Ch17-HW

1) The economy is overheating. GDP is far above potential, and fears of inflation are mounting. What is the Fed’s response? Illustrate the effects on three diagrams: Money Market, Investment, and Aggregate Supply and Demand. Describe what happens to money supply, interest rates, investment, GDP, and the price level of the economy.

2) As of August 9, 2007, was the Fed more likely to pursue contractionary of expansionary policy? Was their decision an obvious one to make? (i.e., is there any pressure to pursue the other type of policy?) Explain.

3) Read this August 13, 2007 article from The Economist.

A) What is the name of the interest rate US banks charge each other for overnight loans?

B) What is the name of the interest rate British banks charge each other for overnight loans?

C) Why do you suppose these rates are rising?

D) How can “liquidity injections” fix this problem?