Answer to Question #105258 in Economics for Brian

Question

Assume the following data for the economy in the United States:

• Inflation is at 4.5% and has been rising for the last 3 years from a low of 1.2%
• Unemployment is at 4.0% and has been falling for the last 6 years from a high of 7.8%
• The GDP is at $15.36 trillion and has been growing at about 3% for the last 7 years.


Answer the following questions using the data above. EXPLAIN ALL YOUR ANSWERS IN DETAIL.


1. What problem is the economy facing?
2. Assume you are a governor on the Federal Reserve Board of Governors. What type of policy (Easy Money or Tight Money) would you recommend to fix the problem you identified in question 1?
3. Which monetary tool will the Federal Reserve rely on to carry out the policy you recommended in Question 2? Why is it the “tool of choice?” How does it work?
4. What could happen in the economy that might make that policy choice ineffective?

Answer 1

1. From the data presented, in my opinion, the problem is inflation. But, this is moderate inflation. Decrease in unemployment and GDP growth are good indicators of the economy
2. Of course, a tight money policy is suitable for high inflation. Вut, due to the fact that inflation is moderate, then monetary policy should be moderate. I would choose this type of policy
3. The Federal Reserve will use the discount rate tool. The federal reserve system raises the discount rate — for commercial banks, resources become more expensive, they increase credit rates — lending is decreasing — purchasing power of the population is decreasing — demand for goods and services is decreasing — price increases are stopping or slowing down
4. But, this policy choice may be ineffective, with a decrease in purchasing power, aggregate demand decreases, and this is a slowdown in economic growth, as a result of rising unemployment and a decrease in GDP