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The output gap can be difficult to measure because potential GDP must be estimated, and economists’ estimates differ. In 2012, the Congressional Budget Office (CBO) estimated that potential GDP was about $1 trillion lower than the CBO’s 2007 forecast had predicted. a. Was the output gap larger or smaller (in absolute value) in 2012 than […]

In 2009, Simon Johnson, former chief economist at the International Monetary Fund, believed that Fed policies might lead to a sharp increase in inflation. He argued: The large increase in credit from the Federal Reserve can potentially push up prices, even though unemployment remains relatively high. . . . If this seems far-fetched, remember the

In the aftermath of the 2007–2009 financial crisis, the Fed became concerned about deflation. a. Use the IS–MP model including the Phillips curve to show how a decrease in aggregate expenditure could cause deflation. b. What policies should the Fed pursue to attempt to prevent deflation? Use the IS–MP model including the Phillips curve in your answer.

When financial markets do not function well,savers and investors waste resources, and the economy is less efficient. a. How might problems in financial markets affect employment and economic growth? b. Some people argue that the Fed should not interfere in financial markets. Why is maintaining the stability of financial markets important to the Fed’s other

Describe the Fed’s three traditional monetary policy tools. How can the Fed use each of these tools to either increase or decrease bank reserves? Briefly explain how the Fed can reduce the federal funds rate. Why is the federal funds rate considered important if no households or firms (other than banks) can borrow or lend

Explain how the Fed uses open market operationsto target the federal funds rate. Why does the value of the federal funds rate matter? Why is it important to have a central bank to act as a lender of last resort?

Explain how each of the following tools allows the Fed to increase its control of bank reserves: a. The ability to pay interest on reserves b. The Term Deposit Facility (TDF)

The slow pace of economic recovery had Fed officials considering additional stimulus measures in mid-2012, but as a Wall Street Journal article reported, “The Fed is once again finding itself in a difficult spot. Officials aren’t yet sure if the recent slowdown in growth is transitory or permanent.” Explain why it is important for the Fed to

In July 2012, the government of newly elected French president François Hollande announced that it would sharply increase taxes to try to close a government budget deficit. Use the IS–MP model to analyze the effect of this tax increase on the output gap and the inflation rate, assuming that the real interest rate remains unchanged. Is

The International Monetary Fund publishes the World Economic Outlook. Go to www.imf.org and look at the most recent version available. Look at the data for the cyclically adjusted budget deficit (which the World Economic Outlook calls “General Government Structural Balance”) for Brazil, China, France, and Germany from 2000 to 2017. Use the series for the