Question
The following newspaper article was published in 2018. Refer this situation to address the following Question based on a proper theoretical and logical underpinning. The
The following newspaper article was published in 2018. Refer this situation to address the following Question based on a proper theoretical and logical underpinning.
"The Federal Reserve is likely to hike interest rates by 25 basis points as strong employment and inflation in the US as well as strengthening economy have increased hopes for further policy tightening. As two-day Federal Open Market Committee (FOMC) meeting began, there were expectations that the central bank will increase the rates to 2-2.25 per cent range from 1.75-2 per cent. The apex bank is widely expected to increase rates for the third time this year. US unemployment is at record low levels, as the rate of unemployment stood at 3.9 per cent in August 2018. Fed is telling that the current economy is overheated because the unemployment rate is a full point below its "equilibrium" rate, i.e., where it would "naturally" settle at full employment. Inflation has also reached and sustained above the Fed's 2 per cent target for some time now. The US economic growth is also booming on the back of tax cuts and pro-cyclical fiscal policy. Such a tax-cut fueled economy with rising corporate profitability is pulling unemployment down, all the while widening the fiscal deficit and ballooning the alarmingly high national debt. The Fed is seeking to hike rates so that a balance between sustained economic growth and economic risks such as inflation would be reached." How might price inflation and employment be related? Elaborate with the help of Phillips curve. Can a tighter monetary policy choke off a labor market recovery? Critically justify. Support your answer with relevant diagram /s as required.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started