Macroeconomics Essay Example | Topics and Well Written Essays - 500 words - 1

Macroeconomics - Essay Example nd to alarmingly rise if the inflation rate hits 5 or 6 percent; consequently, when levels climb to double digit levels {as it did in the mid/late 1970s}, there was little surprise that Americans named inflation as the ‘public enemy number one’(Hellerstein). Recently, the U.S. has experienced low and stable rates of inflation {3.4% in 2005 and 3.2% in 2006} (Jensen); this has given rise to speculation among policy makers about achieving zero percent inflation. Yes, I recommend the central bank to aim for zero inflation. The main reason is that zero inflation is best suited to achieve what every international monetary policy strives for – maximum sustainable growth via the price stability conduit. This advice was put forward by Alan Greenspan, who had a distinguished career as Chairman of the Federal Reserve from 1987 to 2006 {he was succeeded in August 2006 by present Chairman Ben Bernanke}. Greenspan repeated this advice many times during his 18 year career under 4 U.S. Presidents, namely, â€Å"the fundamental aim of the Fed is maximum sustainable growth over time; the primary role of monetary policy in the pursuit of this goal is to foster price stability.† Economists deduced that Greenspan meant price stability will be achieved when economic growth is increased to the maximum ‘with a stable price level’ {meaning zero inflation}. Greenspan confirmed their deduction during the July 1996 FOMC meeting when he sa id a zero inflation level would no longer alter decision – making. The famous Greenspan principle â€Å"maximum sustainable economic growth is accomplished at zero inflation† was born (Rasche et al.). Price stability should always remain as the explicit key objective for Federal Reserve Monetary Policy. There are several reasons for this. Price stability encourages economic growth; it reduces interest rates, stabilizes financial markets and those economic sectors affected by interest rates; it creates an environment that permits money and the