In light of the Feds latest action to raise interest rates c

In light of the Fed\'s latest action to raise interest rates, consider the classic macroeconomic tradeoff. Is inflation a very real risk for the US economy right now, or is unemployment a greater concern for the future?

Solution

Ans

There is classical tradeoff between inflation and unemployment. Greater the inflation lesser the unemployment and less the inflation greater the unemployment. To avoid this situation policy makes usually raise interest rates to contain inflation during growth phase of economy. But this reduces employment. Similar is situation with usa today. usa has already achieved full employment level since unemployment level is less than natural rate level of 4.5-5%.so there is less concern of containing employment growth while raising interest rates. Also in usa interest rates are currently too low as they were kept almost equal to zero to contain financial crisis. Some increase in rates is now required as economy has moved away from recession. Thus we see usa has good flexibility to increase interest rates to contain inflation