Anticipating the Feds Actions As a manager of a large U.S. firm, one of your assignments is to monitor U.S. economic conditions so that you can forecast the demand for products sold by your firm. You realize that the Federal Reserve implements monetary policyand that the federal government implements spending and tax policies, or fiscal policyto affect economic growth and inflation. However, it is difficult to achieve high economic growth without igniting inflation. Although the Federal Reserve is often said to be independent of the administration in office, there is much interaction between monetary and fiscal policies.

Assume that the economy is currently stagnant and that some economists are concerned about the possibility of a recession. Yet some industries are experiencing high growth, and inflation is higher this year than in the previous five years. Assume that the Federal Reserve chairmans term will expire in four months and that the President of the United States will have to appoint a new chairman (or reappoint the existing chairman). It is widely known that the existing chairman would like to be reappointed. Also assume that next year is an election year for the administration.

a. Given the circumstances, do you expect that the administration will be more concerned about increasing economic growth or reducing inflation?

b. Given the circumstances, do you expect that the Fed will be more concerned about increasing economic growth or reducing inflation?

c. Your firm is relying on you for some insight on how the government will influence economic conditions and hence the demand for your firms products. Given the circumstances, what is your forecast of how the government will affect economic conditions?