Econ 201 hw 6 - 1 From the three articles titled"Fed Cut...

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1. From the three articles titled, “Fed Cut Aims to Contain Damage”, “Fed's Rate Cut Could Be Last For a While”, and “Fed Test: Will It Adjust in Time If Inflation Stirs?” in the online version of the WSJ for September 19, 2007, November 1, 2007, and October 8, 2007 (URLs are below)answer the following questions: a. From the articles above and our discussion on the timing of the Fed policy, explain if the Fed usually takes action to counter undesirable economic conditions before they occur, or, concurrent with such conditions? Explain your answer. Also mention whether you think Fed’s most important job is to control inflation or output (output is also termed the Real GDP or the level of economic activity). The fed always tries to counter undesirable economic conditions before they occure, because: 1) Once bad economic conditions start to take effect, the economic expectancy falls, thus, Fed policies and Δs in Money Supply (Ms) have less and less effect on Δing AD. This is because once the expectancy of the public is broken, even if the money supply is increased the only thing that will happen is that the bank’s extra reserve rates will increase. Also in some extreme cases if there is already a deep recession, even if the money supply Δs, the Δ in λ (interest rates) will be too small or not at all due to the liquidity trap. The Fed’s most important job is to keep low levels of inflation. Second to keep output at the level of full employment / at the potential real GDP point. PRGDP.
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