- On May 4 The United States Federal Reserve Raised Its Benchmark Interest Rate By Half A Percentage Point In An Aggressi 1 (155.76 KiB) Viewed 36 times
On May 4, the United States Federal Reserve raised its benchmark interest rate by half a percentage point in an aggressive attempt to curb surging US annual inflation, which currently stands at a four-decade high of 8.3%. And eurozone inflation reached a record 7.5% year on year in April, according to preliminary estimates. These sharp, sizeable price increases – accelerated by the war in Ukraine – are raising the specter of stagflation and may significantly erode households' purchasing power. Vulnerable lower-income groups are likely to be most severely affected because they have limited access to financial markets, making it difficult for them to smooth their consumption. Furthermore, because prices increase more for the basic goods that dominate low-income households' consumption basket, the rich-poor inflation gap – a phenomenon economists call "inflation inequality"- could widen further. From the article above, answer the following questions 1. Draw a graph of Inflationary gap using aggregate demand and aggregate supply model (1 Mark) 1. Explain How central bank will implement contractionary monetary policy to reduce the inflation rate and bring the economy to the level of full employment (3 Marks)