In this question, we drop the assumption that the Fed is certain of the correct

Question

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 goals for equilibrium inflation rates and employment growth? 4pts

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

(a) The goal of Fed for eqilibium inflation rates and employment growth is to decrease the rate of interest. It helps in reducing the the inflation by increasing the consumption of people. It also tries to improve the living standards of people.

(b) The circumstances in the US and world economy which suggest a "dovish", " slow approach to raise money market rates is approximate at this time is the decrease in the GDP and economy of the nation.

(c) The danger in pursing an extremely dovish policy of very slow and cautious increase in the federal funds rate targets the economy at the declining way where the rate of economy is affecting the market drastically.

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