Question

Economic conditions are as follows: GDP growth at 1.5%, inflation currently at 8.5% and unemployment at 10.2%. If you were the chairperson of the Fed, what would your monetary policy be? That is, would you increase, decrease or keep interest rates same using open market operations. Assume current rates are 3.0%. What condition would you be most focused on and why? Do you buy or sell securities to achieve the change in rates? How it would change interest rates (all else being equal) effect each of the three conditions - inflation, GDP and unemployment (increase, decrease or have no effect)?

If you decide no change in policy, explain why. Be detailed in your answer. Explain why you think each of the current conditions need no action from the Fed

Answer 1

It can be seen that GDP growth is very low but inflation and unemployment rates are quite high. To curb this, the monetary policy should be such that which reduces the Credit in the economy.

1.Fed needs to sell securities in the open market. In this way, excess credit in the economy will be sucked up by Fed and inflation rate will become less.

2.The interest rates will be increased so that the people put their money in banks to lower the money supply, which in turn will lower inflation.

GDP grows when inflation is moderate nd unemployment is lowered. So Fed will increase the rates from 3.0%.