Question

Growth in GDP is another economic measure monitored by the Federal Reserve. As a rule of thumb, what are the growth targets for our economy. Explain the consequences of meeting the objectives versus being too high or too low? Give examples of economies that are outside the rule of thumb goals and what have been the consequences?

Answer 1

Federal Reserve has twin objectives of full employment and price stability. Price level has decreased to 1.5 %. Growth target has been set close to 3 % while Trump is trying to achieve 4 %. Unemployment rate is 3.6 %. Which is below the natural rate of unemployment.

Since inflation rate is low, so Fed can go for pushing up growth rate little further, But excessive push would result into rise in price level. There must be Proper balance between price and growth rate. Fed has preannounced levels of inflation and growth rates, so it acts according to these prescriptions. It provides certainties to government actions and businesses also act accordingly and rationally.

Countries that work outside rule of thumb are likely face economic fluctuations. Venezuela and few African countries are examples of such actions. These countries adopted excessive lose monetary policies and that resulted into hyper inflation. So economies were shattered. Uncertain nature of policies and actions reduced investment drastically in these countries.