Question

In his speech Monetary Policy and the Dual Mandate, Frederic Mishkin states:  “…the level of maximum sustainable employment is not something that can be chosen by the Federal Reserve because no central bank can control the level of real economic activity or employment over the longer run.”  What is the reasoning behind this statement? Does it imply that the Federal Reserve has no ability to boost the economy in times of recession?

Answer 1

Answer - The statement given probably means that the central bank can alter the money supply , increase or decrease the lending power of the banks and borrowing power of economy through changes in the interest rates. But the ultimate decision is in hand of public. It depends upon the MPC of public that how much of that increased money supply it wants to spend as consumption or invetsment. Hence in the long run , the economy has to decide the level of consumption and investment to be able to function at the natural level. The unemployment will adjust accordingly but central bank cannot control this In long run. It depends all upon the saving and consumptuon behaviour.