Fed's Critical Moments: Orphanides on Volcker Shock

The video discusses the economic policy ideas of the 1970s, focusing on the challenges faced by policymakers in achieving maximum employment and price stability. It highlights Arthur Burns' role at the Federal Reserve and the irony of his failure to control inflation despite his expertise. The video then shifts to Paul Volcker's shock therapy approach to monetary policy, emphasizing the importance of managing inflation expectations and the lessons learned from Volcker's tenure. The Federal Reserve's strategies in 2012 and 2020 to maintain price stability are also covered.

What was the primary goal of economic policies in the 1960s and 70s?

• To achieve a Great Society with maximum employment and price stability

• To increase government spending

• To reduce taxes

• To focus solely on price stability

What was Arthur Burns criticized for during his tenure as Chair of the Federal Reserve?

• Implementing strict monetary policies

• Ignoring the business cycle

• Prioritizing maximum employment over controlling inflation

• Focusing too much on price stability

What was the purpose of Paul Volcker's 'shock therapy'?

• To lower interest rates

• To reduce the money supply and control inflation

• To focus on employment growth

• To increase government spending

What was a key change in the Federal Reserve's operating procedures under Paul Volcker?

• Prioritizing employment over inflation

• Focusing on reducing the money supply

• Increasing reliance on the federal funds rate

• Eliminating interest rates

What was a major challenge faced by the Federal Reserve in the late 1970s?

• Reducing taxes

• Increasing government spending

• Focusing solely on employment

• Calibrating the federal funds rate to reduce inflation

What lesson did Paul Volcker emphasize regarding inflation?

• Inflation should be ignored in favor of employment

• Inflation is not a concern for monetary policy

• Inflation should never become ingrained

• Inflation should be allowed to rise gradually

What was the Federal Reserve's new definition of price stability in 2012?

• No specific target

• 3% inflation

• 2% inflation

• 1% inflation

Why was it important to maintain well-anchored inflation expectations?

• To reduce government spending

• To prevent inflation from becoming ingrained

• To focus on employment

• To ensure gradual economic growth

What was a significant outcome of the Federal Reserve's policy strategy revision in 2020?

• Increased focus on employment

• Doubling down on maintaining well-anchored inflation expectations

• Eliminating interest rates

• Reducing government intervention

What was the impact of forecast errors observed over the past couple of years?

• Stable inflation

• No impact on inflation

• Higher than expected inflation

• Lower than expected inflation