Suppose the target rate of inflation is 3 percent and real GDP equals potential GDP. Now, suppose a major oil-producing country decides to increase the supply of oil in order to discipline the other members of the oil-producing cartel. There is a sharp decline in the price of oil, and, in turn, the rate of inflation falls to 2 percent in the short run. The Fed views this decline in inflation as temporary and expects the price adjustment line to shift back up to 3 percent next year, which it does.
Definitions:
Bootstrapping
Funding a business startup or growth through internal cash flow and without external investment.
Expand
To increase in size, volume, number, or scope.
Outside Investors
Individuals or entities that invest capital in a business but are not part of its daily operations or management.
Penny Pinching
A term used to describe the act of being very careful with money and spending it sparingly.
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