Article Summary Since the Fed Introduced Its Annual Goal of an Inflation

question 154

Multiple Choice

Article Summary
Since the Fed introduced its annual goal of an inflation target of 2 percent in January 2012,the personal consumption expenditures price index has fallen short of this goal more than 90 percent of the time.This has prompted some analysts and Fed officials to acknowledge that the Fed has lost some of its credibility in achieving its 2 percent target,and has Fed officials again discussing whether to hold off on raising interest rates.Fed Governor Lael Brainard stated that the Fed's failure to increase inflation to its 2 percent target may have influenced how companies and consumers view the inflation outlook,stating "Households and firms have experienced a prolonged period of inflation below our objective,and that may be affecting their perception of underlying inflation." Since expectations influence the actions of companies and consumers,they help determine where inflation actually ends up.Consumers who are accustomed to low inflation will resist paying up for goods and services,and therefore companies will avoid increasing wages,fearing they won't be able to raise prices to cover the added labor costs.It's a vicious circle that can hinder the Fed from achieving its inflation target.
Source: Rich Miller,"Fed Officials Admit They've Lost Some Credibility on Inflation," bloomberg.com,September 13,2017.
-Refer to the Article Summary.If the Federal Reserve's announcements about upcoming monetary policy decisions are not seen as credible,as is mentioned in the article summary regarding the Fed's 2 percent inflation target,which of the following would you expect to see?

• A)Inflation expectations will accurately reflect actual inflation.
• B)Expansionary monetary policy will result in lower rates of inflation.
• C)Firms and workers will be unable to accurately forecast changes in the rate of inflation.
• D)The Federal Reserve will have more control over the inflation rate.

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Definitions:

Differential Validity

The extent to which a test or measure predicts outcomes differently for various groups, often examined in the context of fairness and bias.

Validity

The degree to which a tool, test, or method accurately measures what it is intended to measure.

Subgroups

Smaller, distinct groups formed within a larger group based on shared characteristics or interests.

Valid for One Group

A criterion or measure that is accurate or applicable to a particular group of people or category but may not be relevant or accurate for others.