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Imagine that you are a staff economist for the Federal Reserve Open Market Committee (FOMC). You're job is to present a five page brief to the open market committee regarding the policy decision to be made at the next board meeting.
Assume that currently, the Federal Reserve is targeting the federal funds rate at 2.75%. You need to present a policy recommendation for the target federal funds rate over the next two months.
You're report should include the following:
1) A specific statement of the new policy to be followed (i.e. should the federal funds rate be lowered or raised and, if so, by how much). The should be followed up by a discussion of the current state of the economy (i.e. back up your decision).
2) Given your answer to part (1), you need to describe the proper implementation of the recommended policy.
- How will T-Bill rates be affected?
- Given (1) and your answer to (2a), how will M2 money demand be affected?
- What is the current M2 multiplier?
- Given your answers to (a), (b), and (c), what open market operation will be needed to implement your policy?
You should include in your report all your data to support your policy decision.
