Assume the current Fed Chairman tries to impress the President and sets a short-term interest target....

Assume the current Fed Chairman tries to impress the President and sets a short-term interest target. Explain how (or if) he can still control inflation in the long run.

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Expert Solution

Expectations in long run play an important role in the inflation dynamics.Several types of formation options will be made to do the selection.Change in inflation is based on the particular mechanism selected.The long run inflation is defined as monetary phenomenon and there should be a evidence to revision done at time of announcement policy changes.However the participants or the people in the economy scrutinise the policy actions than announcements of evidence in the policy shift.The long run expectation is an anchor or end point that at any point of time is predetermined in the calculation in the expectation of having a shorter horizon.Different methods can be used to control this and can be put in to give out the expectation that will be need in the long run by increasing the rate of interest in the central bank and mostly the monetary policy can be used to control the inflation .A monetary policy is characterized as a policy reaction function whose structures will implicitly reflect long term policy and any deviation from the speed will be eliminated and the changes in the policy functions including the speed of adjustment after the reaction functions coefficients.

Rahul Sunny answered 1 year ago

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