Answer critical thinking please

ECONOMICS IN YOUR LIFE Rethinking "Inflation Targeting" at the Fed John Williams, president of the Federal Reserve Bank of New York, is the first month, it would have to aim for an inflation rate higher than frustrated by the Fed's performance over the preceding several years. 2 percent in the second month to ensure attaining a 2 percent inflation Each month, the Fed has announced an "inflation target"-an annu- rate over the full two-month period. This procedure. Williams argues, alized rate of inflation that it states it has determined to be consistent would guarantee that the Fed would actually achieve the annual infla- with attaining its broader objectives for real GDP and the unemploy- tion rate deemed to be consistent with its ultimate economic goals. ment rate. During a 6-year period, however, the actual inflation rate has ended up at a level lower than the announced monthly inflation FOR CRITICAL THINKING target in about 94 percent of the months. How might the theory of the short-run Phillips curve be applied to Williams thinks that he has a solution, which he calls "flexible motivate the idea of the Fed aiming to achieve a particular inflation price level targeting." Under his proposal, suppose that the Fed's target in order to attain a desired rate of unemployment? inflation target is, for instance, 2 percent. At the end of any month during which the Fed fails to generate a rise in the price level to a value REAL APPLICATION 2 percentage points higher than before, it would in the following month If the Fed succeeds in raising the rate of inflation, are you necessar- be obliged to boost the price level at the end of the next month that is ily worse off? Why or why not sufficiently higher to make up for it's earlier target "miss." In effect, it the Fed were to deliver an annualized inflation rate below 2 percent in Sources are listed of the end of this chapter