Assignment:
Freedonia has an economy similar to the USA. Much smaller of course. It has a central bank called the Federal Reserve which controls the money supply and monetary policy. Use the table below to answer the following questions.
The Fed, Money and Banking
|
INDICATOR
|
LAST
YEAR
|
2"
QUARTER
|
3"
QUARTER
|
THIS
QUARTER
|
|
Real GDP
|
4.5%
|
3.6 °A.
|
2.6%
|
1.4%
|
|
CPI
|
5.4%
|
6.1'%
|
6.5%
|
7.6%
|
|
Business Investment (0)
|
128
|
121
|
105
|
98
|
|
Unemployment Rate
|
4.2 %
|
3.3 %
|
3.3 % .
|
3.3 %
|
|
Fed Funds Rate
|
4.0%
|
4.2%
|
4.2%
|
4.2%
|
Q 1. Where is the economy on the business cycle? Explain. Be as specific as possible!
Q 2. Discuss these options for the Fed.
a. Which tool(s) could the Fed use to carry out this policy? Tell how the tool ought to be used (increase or decrease, forexample).
b. Which tool or tools should be used? Explain why!
Q 3. How will your policy affect; (A) Interest rates? (B) Prices? (C) Home Sales?
Q 4. Draw and label an Aggregate Demand and Aggregate Supply diagram. Place AD according to data and then AD1 due to your policy.
Q 5. How will this Fed's policy affect loanable funds? Include a money supply diagram in your answer.
Q 6. Discuss how this will affect Freedonia's economy (income, output and emploment)?