ECON2420 : Consider the Following Viewpoint from Larry Summers in the Washington - Economics Assignment Help

Assignment Task:

Task:

Question 1

Consider the following viewpoint from Larry Summers in the Washington Post, 24 May, 2021. Full article available here. “The covid-19 chapter in U.S. economic history is coming to a close more rapidly than almost anyone expected, including me. Within weeks, gross domestic product will reach a new peak, and it is likely to exceed its pre-covid trend line before year’s end, as the economy enjoys its fastest year of growth in decades. Job openings are at record levels, and unemployment may well fall below 4 percent in the next 12 months. Wages and productivity growth are increasing. This is both very good news and a tribute to the aggressive covid-19 containment policies of recent months, as well as to strong fiscal and monetary policies since the onset of the pandemic. Our economy has outperformed those of other industrial countries. U.S. policymakers can take satisfaction from that. But new conditions require new approaches. Now, the primary risk to the U.S. economy is overheating — and inflation…… …Fed and Biden administration officials are entirely correct in pointing out that some of that inflation, such as last month’s run-up in used-car prices, is transitory. But not everything we are seeing is likely to be temporary. A variety of factors suggests that inflation may yet accelerate — including further price pressures as demand growth outstrips supply growth; rising materials costs and diminished inventories; higher home prices that have so far not been reflected at all in official price indexes; and the impact of inflation expectations on purchasing behavior. Higher minimum wages, strengthened unions, increased employee benefits and strengthened regulation are all desirable, but they, too, all push up business costs and prices. … First, starting at the Fed, policymakers need to help contain inflation expectations and reduce the risk of a major contractionary shock by explicitly recognizing that overheating, and not excessive slack, is the predominant near-term risk for the economy. Tightening is likely to be necessary, and it is critical to set the stage for that delicate process.

” Your task is to:

(i) Explain the similarities and differences of this viewpoint compared with that of the U.S. Federal Reserve, expressed in comments from Chair Jay Powell, that there is very little risk of long term inflationary pressure from the Fed’s current policy stance. An example of this viewpoint is here.

(ii) Illustrate both viewpoints using the model of aggregate demand, inflation and output gaps that we have studied in this course.

(iii) Which view do you think has greater merit? Why? (Marks will not be allocated separately to points (i), (ii) and (iii). Rather an overall mark out of 10 will be given.)

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