Question

1. Suppose that oil prices hit an all-time high of $200 a barrel, driving U.S. inflation up to 7 percent per year. At the same time, weak U.S. growth and increasing foreign competition have generated unacceptably high levels of unemployment in the United States. You are the chair of the Federal Reserve. What do you suggest?

Answer 1

In order to target inflation the FED can use the measure of inflation targeting. In this measure the central bank of a country does not  allows the inflation levels in the country to go up beyond a certain level and makes a target set forth and keeps the inflation in the economy under control.

Now oil prices reaching an all time high will push the inflation levels to new peaks. The central bank can increase the interest rates of the country thereby decreasing the money supply. This decrement will also decrease the demands in the economy and automatically the excess supply will also decrease . As result the demand and supply levels will match and inflation will see a decline due to low demands.

Also in order to counter unemployment the central bank can make use of monetary policy and should provide cheaper credits to boost the production. The domestic market should be focussed and any government should focus on making and developing the domestic markets so that employment is generated. This can be achieved by cheaper credits and decreasing the tax rates. This move will incentivize the domestic workers and industries to start the economic activities and thereby increasing the levels of employment in the economy.