Question

Currently, the Fed does not have a responsibility of correcting asset bubbles because __________.

Select the correct answer below:

doing so would be unpopular with investors

its dual mandate only includes achieving low inflation and low unemployment

it does not know when stock prices and housing prices (asset price bubbles) are too high, too low, or just right.

the government would not want the Fed to have too much power in the economy

Answer 1

Currently economy is in recession phase AD is low, price level is low

Asset bubble means very high price of assets like stocks , bonds etc which leads to inflation

But currently federal bank does not have a responsibility of correcting assests bubbles because

Option A that is doing so would be unpopular with investors

As already AD is low, investment is low, if federal bank started correcting assets bubble by raising interest rates so that prices of assets can be reduced then with high interest rates, investors will further decrease investment and this AD

So federal bank will not correct it currently.