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interest rate from 0.5 to 0.75 per cent in December 2016. The article accredits this
shift in monetary policy to confidence in the economic outlook and that inflation
will track closer to the two percent target. Monetary policy, are actions taken by
the central bank, in this case the Fed, to control the money supply with various
tools, including interest rate, to address a macroeconomic objective, in this case
dampening inflation
The article states, virtually all signs from the U.S. economy are showing
signs of improvement. This indicates high levels of economic growth and real
national output (GDP) (Y) and low unemployment. As the economy approaches full
employment (LRAS), labour shortages cause firms to give higher wages to
employees. Increased aggregate demand, measured by total expenditure, exceeds
what firms are able to supply causing firms to increase prices, resulting in demand
pull inflation. The Fed policy reduces inflation by hiking up the interest rate. The
impact of this is shown below:
Diagram 1