Treasury Secretary Janet Yellen Says She Was Wrong About the Risks of Inflation

EconEye Admin

4 years ago

Janet Yellen said she was wrong a year ago when she anticipated inflation would not be a problem. “Large shocks to the economy have boosted energy prices,” Yellen said. The Fed has begun raising interest rates aggressively.—npr.org

Answer the following questions to check your understanding of the story.

What is the effect of rising energy prices on the U.S. economy?

Rising energy prices ____________.

a) decrease both short-run and long-run aggregate supply, which raises the price level and decreases real GDP

b) decrease short-run aggregate supply, which raises the price level and decreases real GDP

c) increase aggregate demand, which raises the price level and increases real GDP

d) decrease short-run aggregate supply by more than aggregate demand decreases, raise the price level, and decrease real GDP

Do rising energy prices change aggregate supply or aggregate demand? What is the effect on the price level and real GDP?

Rising energy prices decrease short-run aggregate supply. The SAS curve shifts leftward. The price level rises and real GDP decreases.

What effect will the Fed’s “raising interest rates aggressively” have on the economy?

The Fed’s actions of “raising interest rates aggressively” will _____________.

a) decrease aggregate demand, lower the price level, and move the unemployment rate further below the natural unemployment rate

b) decrease short-run aggregate supply and move the economy into a stagflation

c) increase short-run aggregate supply, lower the price level, and move the unemployment rate toward the natural unemployment rate

d) decrease aggregate demand, lower the price level, and move the unemployment rate toward the natural unemployment rate

Does the Fed’s policy of raising the interest rate change aggregate demand or short-run aggregate supply? Does the price level rise or fall? What happens to real GDP and the unemployment rate?

When the Fed raises interest rates aggressively, aggregate demand decreases, and the AD curve shifts leftward. The price level falls and real GDP decreases. The unemployment rate rises from its level of 3.6 percent closer to the natural unemployment rate of 4.4 percent.

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