Author Question: Suppose the measured unemployment rate is 7.4 and the natural rate of unemployment is 5.1. In this ... (Read 107 times)

humphriesbr@me.com · **on:** Jun 29, 2018

Suppose the measured unemployment rate is 7.4 and the natural rate of unemployment is 5.1. In this situation, policymakers should

A) attempt to stimulate the economy.
B) attempt to slow the economy.
C) not intervene in the economy.
D) The actions of policymakers will depend on how much of the natural rate is frictional unemployment and how much is structural unemployment.

Question 2

After the Fed raises the federal funds rate, the effects on the economy can take up to two years before they occur. Is this statement accurate? Lay out the time path of how an increase in the federal funds rate affects the economy.

What will be an ideal response?

lucas dlamini · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

A

Answer to Question 2

The statement is accurate. While there are immediate, short-term effects from the Fed raising the federal funds rate, there are also long-term effects. Immediately, short-term interest rates and the exchange rate rise. Within a few weeks to months the quantity of money and supply of loanable funds decreases and the long-term interest rate rises. Up to a year later consumption expenditure, investment, net exports, aggregate demand, and the real GDP growth rate all decrease. Finally, around two years later the inflation rate decreases.