Re: When should the Fed act against inflation?
root wrote:
Take two scenarios:
1. the government runs a deficit, pumps money into the economy and
prices rise as a consequence.
2. global demand for oil exceeds supply leading to an increase in
the cost of energy which trickles through the economy causing
an increase in prices.
What tools does the Fed use to differentiate between these two effects?
For the second scenario the price index can be split into seperate
parts and therefore major price rise in certain catergories can be
noted and treated e.g. decrease tax on oil, (if you believe high oil
problems are a bad thing?)
The first scenario can be considered by looking at the rate of growth
and other factors that increase aggregate demand e.g. rise in house
prices and this can be controlled by adjusting interest rates.
.
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