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Principles of Macroeconomics

Homework Problem #7: Monetary Policy

(A)   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 4.8% 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.

•         What problem is the economy facing?

•         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?

•         Which tool(s) would you recommend using to fix the problem you identified in question 1?

•         What could happen in the economy that might make that policy choice ineffective?

(B)  Question 1: The Economy in the United States

Look up the current data for the economy in the United States so you have an idea what exactly the problems are in this country today. GDP Information is maintained by the Bureau of Economic Research. Unemployment and Inflation information is maintained by the Bureau of Labor Statistics. The tables in the question are hyperlinks that will bring you to the data base you need. In addition to the information from the tables, please assume the MPC in the United States is .75 and the NRU is 5.0%

a) What is the current rate of Unemployment in the United States? http://data.bls.gov/timeseries/LNS14000000

b) What is the current level of GDP in the United States? http://bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=5

c) What is the current level of inflation in the United States? http://data.bls.gov/timeseries/CUUR0000SA0?output_view=pct_12mths

d) Given all the information you looked up in parts a through c, explain in detail exactly what problems the United States is facing today. Be sure to refer to your text as you explain the problems so you are able to explain not only what the problems are but why they are problems. You also have the history of each variable from the tables you linked to so you can include not only the current data in your explanation but also the trends. Be sure to address all three variables even if you feel one may not be a problem. If a variable is not a problem, explain why.

Question 2: Fiscal Policy

Using the information and analysis you acquired in Question 1, recommend and explain in detail what government should do to solve the problems. Be sure to explain what should be done and why you believe it will be successful. Also use the analytical tools you have studied such as Okun’s law, the MPC, and the multiplier.

Question 3: Monetary Policy

Using the information and analysis you acquired in Question 1, recommend and explain what the Federal Reserve should do to solve the problems. Be sure to explain what should be done and why you believe it will be successful.