Inflation Eased in October

EconEye Admin

2 years ago

Inflation eased further in October, offering a dose of encouragement as the Federal Reserve looks for enough progress to let up on its fight to tame consumer prices and slow the economy.—washingtonpost.com

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

Why does the Fed’s “fight to tame consumer prices” also slow the economy?

To “tame consumer prices”, the Fed ____________.

a) lowers interest rates, which slows the growth of aggregate demand and real GDP

b) lowers interest rates, which slows the growth of short-run aggregate supply and potential GDP

c) raises interest rates, which slows the growth of short-run aggregate supply and potential GDP

d) raises interest rates, which slows the growth of aggregate demand and real GDP

Wrong! - What policy action does the Fed take to “tame consumer prices”? Does aggregate demand change? Do short-run aggregate supply and potential GDP change?

Good Job! - To “tame consumer prices”, the Fed raises interest rates, which eventually slows the growth of consumer expenditure and investment. Aggregate demand and real GDP growth slow.

How does the Phillips curve illustrate the tradeoff that the Fed faces when it “fights to tame consumer prices”?

A movement down along ____________.

a) the short-run Phillips curve shows the tradeoff between consumer prices and real GDP growth

b) the long-run Phillips curve shows the tradeoff between consumer prices and real GDP growth

c) the long-run Phillips curve shows the tradeoff between inflation and unemployment

d) the short-run Phillips curve shows the tradeoff between inflation and unemployment

Wrong! - What is the relationship illustrated by the short-run Phillips curve? What is the relationship illustrated by the long-run Phillips curve? What is the tradeoff that these curves show?

Well Done! - The short-run Phillips curve shows the relationship between inflation and unemployment, holding constant the expected inflation rate and the natural unemployment rate. When the Fed “fights to tame consumer prices”, it lowers the inflation rate and the unemployment rate rises in a movement down along the short-run Phillips curve.

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