monetary final paper.docx - 2002 Was There Really a Recovery The Federal Reserve is the central bank of the United States that is tasked managing the

monetary final paper.docx - 2002 Was There Really a...

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2002: Was There Really a Recovery? The Federal Reserve is the central bank of the United States that is tasked managing the nation’s money supply and stabilizing the economy. They do this by focusing on two goals referred to as the dual mandate: maintaining price stability (keeping inflation under control) and maintaining full employment. The main way the Fed conducts monetary policy is by altering the money supply through manipulating the federal funds rate to meet a target. The federal funds rate is the rate at which banks can lend their reserves to each other on an overnight basis. Raising the federal funds rate lowers the supply of available money which increases interest rates. This is known as contractionary monetary policy and this helps execute the part of the dual mandate of controlling inflation. Lowering the federal funds rate increases the supply of available money which lowers interest rates. This is known as expansionary policy and is used to stimulate the economy; this pertains to the other part of the dual mandate which is keeping unemployment low. During the year 2002, the Fed initially held the federal funds rate steady but then decided it was necessary to lower it and pursue expansionary monetary policy to combat the persistent unemployment problem. In 2002, the economy had just barely come out of the 2001 recession. Although the recession was over, the unemployment rate remained stubbornly high throughout 2002, even higher than during the 2001 recession. This is known as a jobless recovery; the economy was recovering from the recession, but the labor market was not as unemployment rose throughout the year. In 2002, real GDP started below potential and continued to move farther below potential throughout the year (Appendix 1). In addition, the real GDP growth rate sharply declined from 3.5% in Q1 to 0.6% in Q4 (Appendix 2). Although GDP started to recover from the recession in
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2001, in Q1 2002 this recovery stalled. The gap between potential and real GDP was narrowing in 2001 until Q1 2002 when it started to widen again, indicating that the economy was not recovering from the recession anymore. The same effect is visible in the real GDP growth rate, which recovered from its 2001 low of -1.7% to 3.5% in Q1 2002, but this recovery also didn’t last as GDP fell throughout 2002 as mentioned earlier. Along with the fall in GDP there is a slight increase in the unemployment rate from 5.7% in the beginning of 2002 to 6% at the end of
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