Question

1. The US central bank, the Federal Reserve, has two goals in mind when it makes monetary policy, keep inflation and unemployment as low as possible. Why is there tension between these goals? What three tools does the Fed (not the Feds- that is the FBI) use to meet these two goals?
2. If the Fed received data which insinuated that the unemployment rate was lower than the natural rate of unemployment, what might the Fed do in response to this information?
3. Compare the goals of the Federal Reserve when it conducts monetary policy to those of the executive branch of the US government when it conducts fiscal policy.
4. What fiscal policy decisions has the current administration made since taking office in 2016? What do various pundits have to say about the administration’s decisions?

5) Discuss the trade-offs that are evident in the Denmark’s decision to provide job re-training for workers who have lost their jobs.

Answer 1

In other words, the supply of labor is greater than the demand for it. ... In times of low unemployment, the demand for labor (by employers) exceeds the supply. In such a tight labor market, employers typically need to pay higher wages to attract employees, ultimately leading to rising wage inflation.Implications of the Phillips Curve. Low inflation and full employment are the cornerstones of monetary policy for the modern central bank. For instance, the U.S.Federal Reserve's monetary policy objectives are maximum employment, stable prices, and moderate long-term interest rates.

Some folks at the Federal Reserve for starters—and not because they are hard-hearted, nasty people. The Fed’s mandate is to achieve stable prices (which the Fed defines as 2 percent inflation) and maximum sustainable employment. Simply put, the Fed and many economists believe, based on history, that when unemployment falls below some threshold, wages and prices go up.Now for most of the past decade, inflation was so far below the Fed’s 2 percent target that the Fed didn’t worry about this and kept interest rates extraordinarily low. But lately, inflation has been creeping towards that 2 percent target—and wages are beginning to rise, too (finally).

The goals of monetary policy are to promote maximum employment, stable prices and moderate long-term interest rates. By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment.Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks, such as the U.S. Federal Reserve. Fiscal policy is a collective term for the taxing and spending actions of governments.

The Use of Fiscal Policy in the United States. Fiscal policy refers to an economic strategy that utilizes the taxing and spending powers of the government to impact a nation's economy. It is distinct from monetary policy, which is usually set by a central bank and focuses on interest rates and the money supply

Pundits like James Bullard and Charles Evans had to say this about the Trump Governments Fiscal policy

JAMES BULLARD, PRESIDENT OF THE FEDERAL RESERVE BANK OF ST. LOUIS

“We think there is some upside risk because the new administration wants faster growth and it is possible some of the things they are talking about will drive productivity higher. But we don’t think that would be likely to occur in 2017. It would probably be 2018 or 2019. That will give us time as monetary policy makers to assess what is being done and make a judgment as we go forward.” (Bloomberg)

CHARLES EVANS, PRESIDENT OF THE FEDERAL RESERVE BANK OF CHICAGO

Evans said rising bond yields in the wake of the November elections caused him to modestly increase his growth outlook, but in addition to that he hasn’t altered his outlook much to reflect potential fiscal stimulus and doesn’t expect to do until after seeing detailed plans from Washington. As for the economic effect of the Trump administration’s trade policies, Evans said he is “still trying to learn about what they’re going to be discussing, negotiating, and all of that… at the moment… you can’t begin to… factor that in.” (Wall Street Journal)