Explain Why the Fed Adjusts Monetary Policy in Response to Both

question 60

Essay

Explain why the Fed adjusts monetary policy in response to both inflation and the output gap.

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Definitions:

MC

Marginal cost; the cost incurred by producing one additional unit of a product.

External Cost

Costs that are not borne by the parties involved in an economic transaction but are suffered by other members of society.

Free-Rider Problem

A situation where individuals consume more than their fair share of a public resource, or shoulder less than a fair share of the costs of its production, without contributing to the resource's provision.

Air Pollution

The presence of harmful or excessive quantities of substances, including gases, particulates, and biological molecules, in the Earth's atmosphere, causing diseases, allergies, or environmental damage.