Part 1
When you hear, “The Fed is raising rates,” you should now be aware of what interest rate that phrase is referring to: the Federal Funds rate. The Federal Reserve bank updates the Target Federal Funds rate based on current market conditions and announces its decisions to the public after every meeting. Use the link below to read about the latest rate hike.
https://www.cnbc.com/2023/07/26/fed-meeting-july-2023-.htmlLinks to an external site.
If you go to the Fed’s website, you can read about the Fed’s current target rate.
https://www.federalreserve.gov/monetarypolicy/openmarket.htmLinks to an external site.
If you scroll down to the bottom of the page, you will see the current target rates in this table:
fter reading the CNBC article and exploring the Federal Reserve’s website, use your knowledge of current market conditions to calculate the Federal Funds Target rate according to the Taylor Rule (Lecture Video 6.3b). Be sure to explain what numbers you use to calculate the current Taylor Rule target and CITE any relevant statistics.
In a discussion post, analyze the relationship between the current Federal Funds target rate and the Taylor Rule target rate. Discuss (in your OWN words) whether or not you believe the Fed is targeting the “right” Federal Funds rate.
A well-reasoned response will address the following questions:
Are there significant differences between the Taylor Rule rate and the current Federal Funds Target rate?
If there are differences, why do you think that is?
Is the Fed currently targeting the “correct” Federal Funds rate?
Supply citations for any article cited or referenced in your post.
**If you cite a statistic, it MUST be attached to a reference.**
Part 2
Directions: Please follow the instructions on the syllabus indicating how to complete and turn in this assignment. Graphs are essential when asked for – write them clearly and label everything! All answers are to be your own.
(8 points) For each of the following, discuss how the proposed change would impact the money supply, money supply growth, and interest rates. EXPLAIN YOUR REASONING.
The Fed raises the reserve requirement.
The Fed lowers the discount rate.
The Fed increases interest payments on reserves.
The Fed buys bonds.
(4 points) Discuss what policy measures the Fed should implement if the economy were in a recession caused by a negative demand shock. What tools should the Fed use and how? Explain how this would impact interest rates, aggregate demand, output, employment, and inflation. Graphs are optional.
(12 points) Using a graph to illustrate, EXPLAIN what happens in the Aggregate Demand and Supply Model when the following events occur. Note: you should use a separate graph for EACH event. Reference your graph in your written response to aid your explanations. LABEL all curves, axes, and equilibriums!
Assume the U.S. economy is in a recession due to a negative demand shock. To promote economic growth and fight unemployment, the Federal Reserve implements expansionary monetary policy.
Assume the U.S. economy is in a recession due to a negative supply shock. To stabilize prices and fight inflation, the Federal Reserve implements contractionary monetary policy.
Assume the U.S. economy is in a recession due to a negative supply shock. To promote economic growth and fight unemployment, the Federal Reserve implements expansionary monetary policy.
Assume the U.S. economy is overstimulated and operating at a level of output greater than potential GDP (Qf). To stabilize prices and fight inflation, the Federal Reserve implements contractionary monetary policy.
(6 points) Your boss knows you are currently taking a macroeconomics course. She is considering expanding the business, taking on a loan to open a second location. She heard on the news that the Fed is “raising rates”. She asks you to explain what that means and how it affects her. Then, she asks if it’s better to expand the business now, or to wait. Respond using your macroeconomic knowledge to back up your recommendations. Write your answer as if you were crafting a response to your boss’s questions via email. Remember, she is not familiar with economic vernacular, so use simple language to explain your reasoning.
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