Use the Fed rule-of-thumb to predict the Fed's target for the federal funds rate for each of the following scenarios if its estimate of the neutral real interest rate is 2%. a. A recession hits the economy, causing output to fall to 0.75% below potential output and inflation to fall to 1%. Predicted federal funds rate: % b. An increase in consumer and business confidence pushes output to 2% above potential output, while inflation rises to 3.5%.
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- Use the Fed rule-of-thumb to predict the Fed's target for the federal funds rate for each of the following scenarios if its estimate of the neutral interest rate is 2%. a. A recession hits the economy leading output to be 0.75% below potential output and inflation to fall to 1%. b. An increase in consumer and business confidence pushes the economy to produce output at 2% above potential output while inflation rises to 3.5%.Use the Fed rule-of-thumb to predict the Fed's target for the federal funds rate and the real target interest rate t for each of the following scenarios if its estimate of the neutral real interest rate is 2%. a. A recession hits the economy, causing output to fall to 0.75% below potential output and inflation to fall to 1%. Federal funds target rate % Federal funds target rate b. An increase in consumer and business confidence pushes output to 2% above potential output, while inflation rises to 3.5%. Target real interest rate: % Target real interest rate: % %When economists speak of the "zero lower bound problem" that the Fed sometimes faces, what are they referring to? 1. It is when short term interest rates are close to zero meaning the Fed can no longer use changes in interest rates to stimulate the economy 2. It is when economic growth in the economy has reached zero percent and the Fed must use aggressive monetary policy 3. It is when the Fed has sold all the securities on its balance sheet and can no longer impact the money supply using open market operations 4. It is when banks choose to hold no excess reserves, making it impossible for the Fed to lower the discount rate
- This question is about interest rates and Fed policy.a) Define an interest rate. Define inflation, and then define real and nominal interest rates.b) In “normal” times (meaning, pre-2008), one of the main tools of the Fed was open market operations. What is the rate that the Fed would affect with this tool? What are expansionary and contractionary market operations?b) What would you want to do to the federal funds rate if the economy was in a recession? In an expansion?c) Suppose that the economy was in a recession, and the rate was close to 0. Would open market operations be effective?You're on the Federal Open Market Committee! a) The economic data indicate that inflationary pressures are growing due to an inflationary s are gap. What policy would you recommend regarding the target federal funds rate?e b) How in practice can the Fed achieve the change in the target federal funds rate you recommended in answering part a - what instruments are available to them?e c) Illustrate your response to part a) with an AS/AD graph showing the impact of the policy you recommended to prevent inflation. Describe the anticipated effect of your policy on interest rates, aggregate demand, and the short-run macroeconomic equilibrium.e. In April 2022 theFederal Reserve boosted its target for the Federal funds rate for the first time in 14 years, increasing it from a 10-year low of .25% to 4.25%. What role did the Biden Administration have in this decision? A. None; the Fed is not accountable to the executive branch of government.B. Some; most but not all of the people who voted for this change are appointees of the Bush Administration.C. Considerable; if the Bush Administration were unhappy with the decision, it could force the resignation of those who voted in ways it did not like.D. Total; policy makers at the Fed serve at the pleasure of the President.
- If the Fed decides to leave the federal funds rate target range unchanged, we would expect _______. A. deflation to occur and the unemployment rate to increase B. the recessionary gap to increase C. potential GDP to increase and the full-employment quantity of labor to increase D. inflation to increase and the unemployment rate to decreaseIf the COVID-19 recovery continues and inflation starts to rise, what effect would a decision by the Fed to not change the federal funds rate target range have on the U.S. economy? If the Fed decides to leave the federal funds rate target range unchanged, we would expect _______. A. deflation to occur and the unemployment rate to increase B. the recessionary gap to increase C. potential GDP to increase and the full-employment quantity of labor to increase D. inflation to increase and the unemployment rate to decrease Thanks!b) The Federal Reserve raised the target range for the fed funds rate by 75bps to 2.25%- 2.5% during its July 2022 meeting, the fourth consecutive rate hike, and pushing borrowing costs to the highest level since 2019. Fed fund futures implied investors were pricing in a more than 81% chance of another supersized 75 basis-point interest rate hike in September. Explain to Jay the potential economic forces behind the Fed rate hike and the impact of interest rate changes on the overall economy.
- TRUE FALSE The more the Fed accommodates shocks to money demand, the larger the (government) spending multiplier.1. If LRAS = $500 billion, RGDP = $700 billion, and MPC = .8, then what should the Fed do? Be specific and list all three options. Also draw and label both the current situation and what would occur as the government impacted the economy through their actions. 2. What are the impacts in the short run of the above actions on the following: the market interest rate, the quantity of money demanded, investment spending, aggregate demand, potential output, the price level, and equilibrium RGDP.Suppose that the next FOMC meeting is coming up in a few days and the official inflation and output gap numbers have just been released. The current federal funds rate is 1.25%, the long-term fed funds rate target is 3.25%, and the inflation rate target is 2%. According to the release, inflation is currently at 1.25 percent and the output gap is -0.5 percentage points. Given the information above, the expected federal funds rate is _____ percent.