The prevention of asset price bubbles from forming.

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Chapter 31, Problem 4DQ

To determine

The prevention of asset price bubbles from forming.

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During the early months of the pandemic, the inflation rate fell well below the 2% target which would have alerted the Federal Reserve Bank to take action. Why was that the case? Did the Fed have anything to do with that process?

"Animal spirits"—optimism about and predictions for the current and future state of markets—can fuel increased spending on things like homes and financial instruments, even when those "spirits" are not based on concrete information. If the Federal Reserve or other government entities feel that increased spending on real estate isn't merited by actual economic conditions and is leading to an asset price bubble, in your opinion, should they intervene? It depends on how certain the government is that a price bubble exists or will exist. No. The government should not tell people how to spend their money. It depends. If the information is exclusive to the government, it should share it. But if the information is publicly available, the government should stay hands-off. Yes. The government has an obligation to step in whenever it can assist with things like price bubbles.

To what extent is the Federal Reserve independent of political pressures? Is this independence appropriate?