Question

The following two tables are used in all the following questions. Thus, part of the following questions involve determining exactly what you need for each question. Please assume that for GDP calculations, only two things are produced in this economy: houses (a good) and dog walking (a service). Please ignore coffee for the GDP calculations. Also, assume that 2018 is the base year for GDP calculations. The base year for the CPI is not given.

Year	Houses Produced (millions)	Average House Price	Dogs Walked (millions)	Average Dog Walking Fee
2018	1.00	$200,000	1,000	$25.00
2019	1.01	$208,000	1,010	$25.10

Year	Nominal price of a cup of coffee	CPI	CPI Market Basket	Nominal interest rate on a car loan
1989	$1.70	180	$28,800	5%
1999	$1.85	200	$32,000	3%
2009	$1.95	220	$35,200	2%
2018	$1.98	245	$39,200	5%
2019	$2.00	250	$40,000	6%

In which year do you think it most likely that the Fed was stimulating the economy?

1989

1999

2009

2019

Answer 1

When Fed stimulates the economy, it tends to increase the money supply in the economy.

When money supply in the economy increases then interest rates tends to fall.

Fall in interest rates leads to increase in consumption and investment spending thereby stimulating the aggregate demand and leads to increase in real GDP or output.

It can be seen from the given table that interest rate is at lowest in 2009 at 2%.

This means that Fed was most likely stimulating the economy in 2009.