Suppose that a drought decreases potential GDP in Artica to $250 billion. Explain what happens if the central bank lowers the federal funds rate. Do you recommend that the central bank lower the interest rate? Why?
10.Departing Fed official takes shot at policies
“When you encourage consumption by inhibiting your interest rates from rising to their equilibrium level, you will in fact buy problems, and we have in fact bought problems,” Kansas City Fed President Thomas Hoenig said in his final speech in office. The Fed has cut rates to near zero and bought more than $2 trillion in bonds to boost the economy.
Source: Reuters, September 28, 2011
What are some of the problems that near zero interest rates and $2 trillion of quantitative easing have created?
11.Read Eye on the Fed in a Crisis on p. 444. What are the key differences in monetary policy between the Great Depression and the slow recovery from the 2008–2009 recession?
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