Since 1977, the Federal Reserve has been operating under a "dual mandate". However, with shifting emphasis on
which "mandate" should be paramount, this creates tensions for monetary policy. (Adopted from Steelman (December 2011). The Federal Reserve's "Dual Mandate". The Evolution of an Idea).
a. What is "dual mandate"? Why might this imply a dilemma facing the Federal Reserve in the short run when exercising a disinflation policy? Explain your answer with the help of aggregate-demand-aggregate-supply model.
b. "With a more credible central bank, short run aggregate supply curve tends to be steeper . This implies a lesser tension for monetary policy" Based on your answer in (a), justify this argument.
c. What is time inconsistency problem faced by the Federal Reserve when exercising the "dual mandate"? Why does it imply monetary policies better be conducted by rule rather than discretion? Explain
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