The AD-AS Model and the Effects of Monetary Policy

 In a speech, titled Recent Economic Developments, Monetary Policy Considerations and Longer-Term Prospects (https://www.federalreserve.gov/newsevents/speech/powell20160628a.htm.), in June 2016, Jerome Powell, a member of the Federal Reserve’s Board of Governors, then, stated that the fraction of the U.S. population aged 25 to 54 who were working or actively looking for work “is now below those of most other advanced economies, including the U.K., France and Germany, for example” (para. 7). He also stated, “I am inclined to believe that there are potential workers at the margins of the labor market who will return as the recovery continues” (para. 7). Evaluate Powell’s two statements, and explain how the two statements are related. Why is it important for the Federal Reserve to accurately estimate how many people might still be brought back into the labor market as economic recovery continues? Why might it be difficult for the Federal Reserve to make such estimates? What potential policy errors might the Federal Reserve make if its estimates are inaccurate? Use the AD-AS model/graph to demonstrate your responses.

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