Question

Predict how monetary policymaking would change, if at all, if members of the Board of Governors of the Federal Reserve were popularly elected to two-year terms and could run for re-election.

Thank You

Answer 1

In the given scenario, these members will take action that will be suitable for the short run and show the positive results in the short run, even if the economy suffers in the long run. Further, they will cater the populist demand of the people who have supported in their elections. It will happen as it will become the basis for their re-election and make them right contender who can show results in the short run.

For example, these governors will keep rates to be low, even if inflation increases as it causes employment to increase in the economy at the cost of weakening value of the USD. But, it lowers the unemployment rate, then they become popular. Though, it is going to harm the economy in the long run due to overheating, poor trade balance and demand pull inflation.