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Argumentative Essay On Full Employment Issue

1315 Words6 Pages

The Federal Reserve believes that the Economy is nearing full employment because the unemployment rate has fallen to 4.1 percent and the inflation rate is hovering below 2 percent. The Federal Reserve (Fed) is wrong to believe that we are at full employment and should not raise the interest rate to contract the economy. They have not taken into account the low levels wages are increasing at, nor the reasons for unemployment falling: many have dropped out of the labor force, or hold jobs that are not sufficient to cover the cost of living. This is causing weak demand. Finally, the Fed does not realize that the consequences of overheating the economy are much less than the consequences of performing contractionary policy before the economy has completely recovered from the 2008 recession.
The Fed decides when we are at full employment using several tools, the main one being the unemployment rate. Being at full employment sounds like a benefit, and something that the economy should strive for, however running at full employment can cause the economy to overheat, which would raise the inflation rate above the targeted rate. The Fed also looks at the inflation rate when considering full employment. In the December minutes of the Federal Open Market Committee (FOMC) the Fed stated that they are aiming for a 2 percent …show more content…

The consequences of being wrong in this situation are much greater than the consequences of being wrong when performing expansionary policy and overheating the economy. If the Fed were to continue expansionary policy, and the economy were to overheat, the result would be a higher inflation rate than the 2 percent the Fed is aiming for. This means the purchasing power of money would decrease, but not much else. Inflation is also a common issue economies face, and there are many tools that can be used to combat it (Mason,

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