About 10 days ago, the Fed raised the interest rate the second time in three months:”The Federal Reserve on Wednesday raised interest rates by 0.25 points, the first increase under new Chairman Jerome Powell. ”
Going back to what you know about the macroeconomy and monetary policy, this assignment deals with the recent rate increases by the Fed and related issues. As I said earlier, there is not much to write or argue about. Just answer the questions. Very brief, one to two sentence answer to each question. Did I say brief? Yes.
Now, before we start, take a look figures 21.15 and 21.16, respectively. As you know, this is the macroeconomic model. This is how the economy looks to an economist (and the Fed).
In this model, the only thing we can control is the AD. For the most part, we cannot control the SRAS. For the most part, SRAS only reacts to what is going on in the world. LRAS is totally out of scope, remember it is the “long – run” AS, so it can only change in a long time, mostly due to structural (inherent) factors beyond our control. The bottom line is, pretty much everything that the Fed does (monetary policy) and the Government (the Congress) does (fiscal policy) is about moving the demand (AD). That is point number one.
Is there a problem with the economy? Does it look like Fig.21.16 A or 21.16 B? Let’s do something to correct it. What to do? Move AD this way or that way.
The Fed (monetary policy): (focus on “Conventional Monetary Policy”) does a, or b, or c, (or a combo) so the AD shifts this way or that way.
The Government (The Congress): Fiscal policy: does something to taxes and / or Government spending, so the AD shifts this way or that way.
Point number two is you must build a wall in your mind between Fiscal Policy (taxes and / or government spending) and Monetary Policy (conventional tools). The two are separate. One is the Government (the Congress), the other is the Fed.
After this brief summary of entire macroeconomics, we are ready to move on. Answer the following questions
1. Which picture did the Fed see before they raised the rates? 21.16 A or B? Briefly explain using a sentence or two.
2. What does the Fed expect to happen to the AD as a result of the rate hikes? Briefly explain.
3. Is what the Fed did with the interest rate consistent with the President’s 1.5 trillion tax cut? Briefly explain.