Problem
1. Describe the effects on the economy if the Federal Reserve uses monetary policy to burst a wrongfully identified asset-price bubble.
2. One of the possible solutions to asset-price bubbles is the enforcement of macroprudential regulation. Financial intermediaries have an incentive to constantly look for profitable opportunities, which often implies the design of new financial instruments and even the circumvention of contemporaneous regulations. How do you think the process of financial innovation affects the effectiveness of macroprudential regulation?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.