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Ahw4100 (1)

Ahw4100 (1) - b What are the main problems with a proactive...

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Econ 1500: HW4: Monetary policy 1. Bernanke: Crash course on central banking a. What did the Fed do in the face of bank panics in the early 1930s? The Fed mistakenly focused on preserving the gold value of the dollar. It raised interest rates. b. What was the impact of this approach on output? Negative: soaring unemployment and severe price deflation c. Why did central bankers get it right in 1987? Because after a stock market crash the Fed focused on maintaining financial stability (The Fed provided ample liquidity) and then cut interest rates to prevent a steep downturn. 2. Bernanke: Asset market bubbles a. What is Bernanke’s preferred tool to minimize booms and busts in asset markets? Transparent accounting; disclosure practices; improving financial literacy
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Unformatted text preview: b. What are the main problems with a proactive monetary policy approach to asset bubbles? The Fed cannot identify asset market bubbles Even if the Fed could identify a bubble, monetary policy is too blunt a tool for effective use c. Empirically, when is credit expansion most often indicative of a bubble? When credit growth is rapid d. Mention 2 mistakes made by the Fed that prolonged and extended the Great Depression In 1928, when inflation was slightly negative, the Fed raised interest rates When the stock market crashed, the fed made no attempt to protect the banking system from depositor runs and panics...
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