Principles of Economics- Mankiw (5th) 771

Principles of Economics- Mankiw (5th) 771 - CHAPTER 34 F I...

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CHAPTER 34 FIVE DEBATES OVER MACROECONOMIC POLICY 797 October of that year Volcker moved to contract monetary policy to combat the high rate of inflation that he had inherited from his predecessor. The predictable result of Volcker’s decision was a recession, and the predictable result of the reces- sion was a decline in Carter’s popularity. Rather than using monetary policy to help the president who had appointed him, Volcker helped to ensure Carter’s de- feat by Ronald Reagan in the November 1980 election. The practical importance of time inconsistency is also far from clear. Although most people are skeptical of central-bank announcements, central bankers can achieve credibility over time by backing up their words with actions. In the 1990s, the Fed achieved and maintained a low rate of inflation, despite the ever present temptation to take advantage of the short-run tradeoff between inflation and un- employment. This experience shows that low inflation does not require that the
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