Question

Answer These Questions

answer the following questions:

The primary way the Fed conducts monetary policy is through which tool?

Why does the Fed watch both inflation and unemployment?

Is the Fed’s goal to reach an unemployment rate of zero? Explain

Is the Fed’s goal to reach zero inflation? Explain

How do changes in the fed funds rate affect the economy? How long before changes in the fed funds rate affect the economy? How much does the Fed change the fed funds rate normally?

Does the Fed Chair set monetary policy?

Why isn’t the money supply in the game?

What is the discount rate? Why is the discount rate not included in the game?

Does this game match how monetary policy is set in the real world? How does the Chair the Fed Game simplify the real world?

Answer 1

1) the primary way Fed conducts monetary policy is through federal fund rate. It is the rate at which financial institutions lend to other financial institutions overnight. This rate is reduced to increase money supply and increases to reduce money supply.

2) This is Fed's policy to maintain full employment at low inflation. This is so because full employment and inflation are not independent of each other. When unemployment is high inflation is low as workers are willing to accept lower wages. Thus it is Fed's responsibility to maintain its dual mandate.

3) no, fed does not want zero unemployment rate. It sets unemployment rate equal to or close to natural unemployment rate because certain level of unemployment is beneficial to motivate workers to put in efforts in the job.