9. U.S. monetary policy: recent policy and issues Aa Aa The Federal funds rate i

Question

9. U.S. monetary policy: recent policy and issues Aa Aa The Federal funds rate is the main interest rate targeted by U.S. monetary officials. The curve on the following graph shows the path of the Federal funds rate target for the year 2008. Note that the horizontal-axis labels for the month appear at the end of the relevant month, so the final unit of 12 is shown at the end of December. FEDERAL FUNDS RATE TARGET (Percent) : : : : : : : : " RANGE -{ 0 2 4 6 8 10 12 MONTH OF 2008 Which one of the following choices best explains the reason why the Federal Open Market Committee chose the path for the Federal funds rate target in 2008 that is shown above? O The U.S. economy expanded rapidly, largely due to a boom in technology investment and productivity. O A financial crisis erupted in Southeast Asia. O The Fed wanted to ensure that the economy continued its expansion with low inflation. O A mortgage debt crisis expanded into a wider financial crisis.

Explanation / Answer

1. FED wanted to ensure that the economy continued its growth with low inflation. There was stress in the economy, effecting the financial markets and the tighness of credit facility. To ensure US economy grows at sustainable level with check in the prices, FED opted to lower the Federal funds rate.

2. Information lag occurs when the policy makers must wait during the time taken for the data collected to be processed and reported in economic manner for making decisions.

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