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Starting in 2011, the Federal Reserve chairman beganparticipating in a quarterly press conference as part of anew strategy to increase communication with the public. Discuss the rationale behind such policy in light ofexpectations, expected versus unexpected inflation, andcredibility.

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Economics:

10th Edition
BOYES + 1 other
Publisher: Cengage Learning
ISBN: 9781285859460

Solutions

Chapter
Section
BuyFindarrow_forward

Economics:

10th Edition
BOYES + 1 other
Publisher: Cengage Learning
ISBN: 9781285859460
Chapter 14, Problem 19E
Textbook Problem
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Starting in 2011, the Federal Reserve chairman beganparticipating in a quarterly press conference as part of anew strategy to increase communication with the public. Discuss the rationale behind such policy in light ofexpectations, expected versus unexpected inflation, andcredibility.

To determine

The rationale behind the quarterly press conference by the Federal Reserve chairman is to be determined.

Explanation of Solution

The rationale behind such policy is to create faith among people about the policies formulated by the Federal reserve. The curve I shows the tradeoff between inflation and unemployment when the inflation rate is expected to be 3 percent. If the actual rate of inflation is 3 percent, the economy is operating at point 1, with the unemployment rate of 5 percent. If the inflation rate unexpectedly increases to 6 percent, then the economy moves from point 1 to 2 along with curve I. The unexpected inflation can affect the unemployment rate.

There are three factors at work here: wage expectation, inventory fluctuation and wage contracts...

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