Question

According to aggregate demand and supply analysis, what would be the effect of appointing a Federal Reserve System chairman known to have no interest in fighting inflation?

Answer 1

Answer: Federal Reserve System or to say Centarl Banks in many of the countries, have to keep track on various factors which play important role in economic situations of coutries.One among them is keeping eyes on inflation level in the economy as provides information of market situation like it presents the purchasing power of Currency.

Hence infaltion is defined as the rate at which the general level of prices for goods and services is rising and at the same time purchasing power of currency is falling.

So Federal Reserve System via its Quantitative as well as Qualitative tools always try to keep infaltion in a required range which is favourable for economy.

Now come to question which says appointing a chairman of federal reserve system who have no interest in fighting infaltion then this will likely to increase the level of infaltion as Companies as well as workers likely to assume higher inflation level or rates at any output.

According to aggregate demand and supply analysis these assumptions can be explained as shifting of aggregate Supply curve towards the left and upward this will lead to decrease in short run supply and increase in rate of inflation hence ultimately decrease in aggregate output in the economy.

However if chairman will consider to fight with higher infaltion rates then this will result into lowering of inflation expectations in the economy hence later on economy will return on to long run equilibrium.

On the other hand if chairman failed to reduce inflation expectations then economy will be seens into short run equilibrium comprised of higher rates of infaltion and lower level of output for longer time.

This is certainly not beneficial for any economy!!

Hope it helps!

Please do upvote.