Central bankers often believe that their hands are tied by the public. Arthur Bu
ID: 1111523 • Letter: C
Question
Central bankers often believe that their hands are tied by the public. Arthur Burns, the Fed chairman under President Nixon, reportedly said in the November 1970 Federal Reserve board meeting that "he did not believe the country was willing to accept for any long period an unemployment rate in the area of 6%." In other words, if AD shocks or real shocks came along that pushed the unemployment rate up, Burns believed he had to boost AD to help the economy: The voters wouldn't tolerate anything else.
In the early 1970s, the economy was hit with some negative real shocks, the most famous of which were the massive oil price increases caused by the OPEC oil embargo. Inflation started off at 4%, and Burns actually behaved according to his stated philosophy.
Did Burns raise or lower AD in the 1970s? If Burns had kept AD fixed instead of shifting it as he did, would inflation have been lower or higher than it actually turned out to be?
Central bankers often believe that their hands are tied by the public. Arthur Burns, the Fed chairman under President Nixon, reportedly said in the November 1970 Federal Reserve board meeting that "he did not believe the country was willing to accept for any long period an unemployment rate in the area of 6%." In other words, if AD shocks or real shocks came along that pushed the unemployment rate up, Burns believed he had to boost AD to help the economy: The voters wouldn't tolerate anything else.
In the early 1970s, the economy was hit with some negative real shocks, the most famous of which were the massive oil price increases caused by the OPEC oil embargo. Inflation started off at 4%, and Burns actually behaved according to his stated philosophy.
Did Burns raise or lower AD in the 1970s? If Burns had kept AD fixed instead of shifting it as he did, would inflation have been lower or higher than it actually turned out to be?
Explanation / Answer
Answer:- The correct option is:- Burns increased AD, inflation would have been lower than it actually turned out to be
Reason:-
AD was increased by Burns when these negative Solow shock appeared. If AD had been kept fixed, the level of inflation would have been lower and it will still be higher than if no Solow shock had resulted.