Question

1. Which of the following is not a reason the Federal Reserve has a 2% inflation target?

a. Higher inflation means lower unemployment.
b. Deflation is particularly bad, and the Fed cannot precisely adjust inflation. inflation.
c. Inflation is likely overestimated, so 2% measured inflation may correspond to 1% or less actual inflation.
d. When nominal interest rates are too low the Fed has fewer policy options. Higher inflation leads to higher nominal interest rates.

2. If the Fed continually engages in expansionary policy in an effort to lower unemployment at the cost of inflation, what is likely to happen?
a. According to the Phillps curve, higher inflation will cause lower unemployment.
b. Unemployment can never exceed full employment, so this will not work.
c. People will come to anticipate the Fed's actions and plan on higher prices in the future. The AS curve will shift instantly and inflation will be produced without a reduction in unemployment.
d. According to the quantity theory, this will increase real GDP and decrease th velocity of money.
3. If the money supply is $3.6 trillion and nominal GDP is $19 trillion, what is the velocity of money? Remember to round to one decimal place.

Answer 1

The Federal Reserve does not have a 2% inflation target because higher inflation means lower unemployment, because inflation is likely overestimated, or because the Fed cannot precisely adjust inflation.

Step-by-step explanation:

The reason the Federal Reserve has a 2% inflation target is not because higher inflation means lower unemployment. Higher inflation actually leads to higher nominal interest rates, which limits the Fed's policy options. It is also not because inflation is likely overestimated, as 2% measured inflation may correspond to 1% or less actual inflation. It is also not because the Fed cannot precisely adjust inflation, as deflation is particularly bad.