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Politician and global environment

In a speech in January 2004, Fed chairman Alan Greenspan said, " I am increasingly of the view that, at a minimum, monetary policy in the last two decades has been operating in an environment particularly conducive to the pursuit of price stability. The principal features of this environment included (1) increases political support for stable prices, which was the consequence of, and reation to, the unprecedented peacetime inflation in the 1970's (2) globalization, which unleashed powerful new forces of competition, and (3) an acceleration of productivity, which at lease for a time held down cost pressures."

(a) Was Greenspan suggesting that the Fed's job in recent years has been easier? Why or why not?

(b) In an environment with low inflation, should the Fed worry about raising interest rates too much or too little when economic growth accelerates. Hint: What if stronger growth is the result of the aggregate supply curve shifting to the right?

(c) What should the Fed do in inflation continues to fall and eventually starts to become deflation?

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(a) Was Greenspan suggesting that the Fed's job in recent years has been easier? Why or why not?

Yes it has been easier when compared to the situation in late 80'ies. Because the government started controlling the inflation over the business cycle and price stability was an achievable objective. As a consequence of more stable inflation, the overall economic volatility had been reduced, and banks were under less risk. The necessity of cyclical adjustments decreased and this made Fed's job much easier.

(b) In an environment with low inflation, should the Fed worry about raising ...

Solution Summary

Political and global environmental factors are noted that impact the economy.

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