1.True or false: The Federal Reserve Board is the nation's number one inflation fighter. Discuss why.
2.Who is the chairman of the Federal Reserve Board. What is his background? What does he believe? How effective has he been? Discuss further.
3.Milton Friedman believes in a steady growth monetary policy. What does that mean and critique this approach.
1. Certainly the Fed takes the threat of inflation very seriously, and is probably our best defense against it. Nonetheless there remains some question as to how effective it is. In spite of the Fed's lowering interest rates, long-term interest rates may not respond as they are tied to public debt. They also reflect the expectation of inflation and long term growth prospects.
Some good commentary on the topic is available at http://www.williampolley.com/blog/archives/2005/10/what_determines.html
In order to fully control the economy, both interest rates and money supply must be chosen with care. The Fed faces a dilemma in that it cannot control both the money supply and interest rates. Suppose money demand curve shifts outward. This will no longer allow for equilibrium at its desired interest rate or money supply. In addition, the efforts of the Fed are often frustrated by fiscal policy. An ever-expanding Federal budget with a tax base to support it has often forced the Fed to monetize the deficit and consequently to increase the growth of the money supply beyond the intended target. The government essentially crowds out private borrowers by pushing interest rates to level unacceptable to business ...