Lecture4 - ECONOMICS 100B Professor Steven Wood 1/28/10...

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ECONOMICS 100B Professor Steven Wood 1/28/10 Lecture 4 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS If you recall, our country are dealing with some big issues in macroeconomics. President Obama spent a lot of time last night on the Statue of the Union address talking about the economy and how jobs are a top priority. I also mentioned last time that the Federal Reserve was meeting to determine what short term interest rates were going to be. The headlines today said: “the Fed was a bit more upbeat” and more optimistic about the outlook of the economy. They also said that the Fed is going to keep interest rates really low. Right now, the interest rate is about 10- 12 basis points, making interest rates for the last 6 months the lowest we have seen since the Great Depression. Whenever the Federal Reserve meets, they also issue a statement at the end of that meeting. We will be talking about statements like these as we go through the course this semester. In their statement, they said that economic activity has continued to strengthen and the deterioration in the labor market is abating. The rate in decline of job loss has begun to slow. They also said that the pace of the recovery is likely to be moderate for some period of time. They see the economy strengthening but it is not recovering robustly. The Fed also always likes to talk about inflation. They think that inflation is likely going to be subdued for some time. There are two reasons for that: 1) there is substantial resource slack in the economy (or the unemployment rate is very high). If we have a weak labor market and wages are not rising quickly, then that means that costs are not increasing very quickly either. 2) Longer term inflation expectations remain stable. What are the Fed going to do? They are going to maintain their target federal funds rate at the 0 to ¼ percent rate. They are likely to warrant exceptionally low levels of federal funds rate for an extended period of time. How long is an extended period of time? The Federal Reserve doesn’t want you to know how long it is. In general, most macroeconomists believe that an extended period of time is 6 months. The basic idea is that we will have very low interest rates between now and the middle of the year. One of the members of the Federal Open Market
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This note was uploaded on 02/16/2010 for the course ECON 100B taught by Professor Wood during the Spring '08 term at University of California, Berkeley.

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Lecture4 - ECONOMICS 100B Professor Steven Wood 1/28/10...

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