4.) In this question, we drop the assumption that the Fed is certain of the corr

Question

4.) In this question, we drop the assumption that the Fed is certain of the correct timing and magnitude of increases in short term money market rates in the US.

a.) What are the Fed’s goal for equilibrium inflation rates and employment growth?

b.) What circumstances in the US and world economy suggest that a “dovish,” slow approach to raising money market rates is appropriate at this time?

c.) What is the danger in pursuing an extremely dovish policy of very slow and cautious increases in the federal funds rate target at this time.

Explanation / Answer

Maximum employment with mandated inflation is the main goal of Fed which can be achieved by keeping the intrest rates flexible with respect to aggregate demand in the economy and supply conditions.

Raising money market rates is likely to fuel inflation which will add more probelms in the economy and can cause defult from investors side.Besides there will be sharp decline in investment rates as a result affecting aggregate demand.

Pursuing catious policy keeping in view the market demand and investment conditions in view can be evry helpful for the fed as it will ,make investors free to invest in accordance with the market conditions.

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