In a speech, titled Recent Economic Developments, Monetary Policy Considerations and Longer-Term Prospects (Links to an external site.)Links to an external site., in June 2016, Jerome Powell, a member of the Federal Reserve’s Board of Governors, then, stated that the fraction of the U.S. population aged 25 to 54 who were working or actively looking for work “is now below those of most other advanced economies, including the U.K., France and Germany, for example” (para. 7). He also stated, “I am inclined to believe that there are potential workers at the margins of the labor market who will return as the recovery continues” (para. 7). Evaluate Powell’s two statements, and explain how the two statements are related. Why is it important for the Federal Reserve to accurately estimate how many people might still be brought back into the labor market as economic recovery continues? Why might it be difficult for the Federal Reserve to make such estimates? What potential policy errors might the Federal Reserve make if its estimates are inaccurate? Use the AD-AS model/graph to demonstrate your response
The IS curve shows the combinations of the real interest rate and the aggregate output that represent equilibrium in the market for goods and services. The MP curve represents Federal Reserve monetary policy. For each of the following, evaluate how the IS curve and MP curve might be affected (if at all):
A decrease in financial frictions.
An autonomous easing of monetary policy.
An increase in the current inflation rate.
Firms become more optimistic about the future of the economy.
The new Federal Reserve chair begins to care more about fighting inflation.
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