Inflation started to creep up in the late 1960's. By 1968, inflation was about 4%, and by 1973, inflation was about 6%. By 1980, inflation was at 13.5%. The Fed, led by Chairman Paul Volcker, engineered a recession that eventually disinflated the economy. Using the economic the concepts learned in class, especially the economics fluctuations model, explain how the Fed  disinflates the economy  from 13.5% to 3.5%, and what the effects of that disinflation are in the SR and the LR. You cannot draw graphs here, so you will need to explain the model and the shifts in words. Be thorough. (The answer should contains 200 words)

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Asked Nov 25, 2019
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Inflation started to creep up in the late 1960's. By 1968, inflation was about 4%, and by 1973, inflation was about 6%. By 1980, inflation was at 13.5%. The Fed, led by Chairman Paul Volcker, engineered a recession that eventually disinflated the economy. Using the economic the concepts learned in class, especially the economics fluctuations model, explain how the Fed  disinflates the economy  from 13.5% to 3.5%, and what the effects of that disinflation are in the SR and the LR. You cannot draw graphs here, so you will need to explain the model and the shifts in words. Be thorough. 

(The answer should contains 200 words)

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Expert Answer

Step 1

Federal Reserve defines disinflation as a period of slowing inflation. The period of deflation is also referred to as the direction of price reduction, during the time of crises. The economics fluctuations model, explain how the Fed  disinflates the economy such as described as below.

PSTAR + Model

 It focuses on the derived quantity theory of money that has been equated with the price level in terms of a stochastic trend along with having the actual levels of output and velocity. 

Macro-Economic Model

It uses as a federal funds rate as a tool of the monetary policy, to disinflation, the Fed needs to have a steady inflation path, as the disinflation has a no permanent effect on the GNP.

Monetarist Model

It is the model which describes as an economic theory that focuses on the macroeconomic help on effect over the supply of money and central banking.

Step 2

During the time disinflation, there have been cascading impacts of the US Fed disinflation economy using contractionary monetary policy through open market operations done by selling government.

The contractionary monetary policy helps to focus over the short-term interest rates to focus over short-term interest rates higher than usual which slows the rate of growth in the money supply or even shrinks it. Contractionary monetary policy is defined as an econ...

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