Below you will find four different scenarios. Each one represents a different qu

Question

Below you will find four different scenarios. Each one represents a different quarter of the year with the initial situation representing the first three months of the calendar year. Your goal is to help keep Gross Domestic Product positive as high as possible, inflation low and stable, and unemployment low and stable.

I am asking you to take on the role of Janet Yellen, Chair of the Federal Reserve System There will be many statements in each of the quarters. As you make your decision to raise, lower, or leave the money supply the same you should be specific about why you chose that particular action and what impact you believe it will have. Each quarter has a new set of situations and they don’t build on the previous quarter.  

You will need to probably write at least one paragraph to defend your actions for each quarter of the year. It’s not enough to just say “lower the money supply” you must have solid reasons and you must be able to accurately predict the outcomes of that decision

Quarter One - Consumer income has been on the rise and it is predicted to rise again in the first quarter of this year.  Mexico and Canada have been forecast to have a very good first quarter also with the income of their average citizen on the rise. Investment spending is predicted to remain the same this first quarter. Will you raise, lower, or leave the money supply the same and why?

Quarter Two - Inflation is on the rise. After several quarters of 1-2% increases this quarter predicts inflation to increase an additional 4 or 5%. Unemployment has dropped to all time lows in the United States. Unfortunately, our major trading partners have seen unemployment go up in their countries and expect it to rise even further in this quarter. Business spending is thought poised to decline while consumer confidence is up. Would you raise, lower, or leave the money supply the same and why?

Quarter Three – Six months of hard work have just ended. People are projected to set anew spending record. Investment spending will likely rebound as orders for manufactured goods jumped at the end of the 2nd quarter. Trade restrictions have been reduced through recent negotiations. The stock market has recorded increased trading activity and that trend will continue. Will you raise, lower, or leave the money supply the same and why?

Quarter Four (last three months of the calendar year) – Inflation is now running at 6% on an annual basis. The trade deficit has grown steadily through the year but very prominently during the last quarter. Forecasters say that if this trend continues we might see inflation end up in double digits. There appears to be no end in sight to the building that’s going on and consumers have taken on a whopping amount of debt. Will you raise, lower, or leave the money supply the same and why?

Explanation / Answer

(1) I would keep money supply unchanged.

Consumer income is increasing, which is poised to increase GDP. If money supply is reduced, consumption demand will be dampened and because investment will remain unchanged, GDP will decrease if money supply reduces. It will reduce output and employment. On the other hand, if I increase money supply, it will raise inflation rate. Therefore, it is best to leave money supply unchanged.

(2) I would decrease money supply. Inflation is increasing, which needs to be contained. Since unemployment is at its lowest, the inflation-unemployment trade-off as is predicted by the Phillips curve will not be too harmful for the economy.

(3) I will leave the money supply unchanged. The economy is clearly on a growth path which should not be force-altered by intervention, until the economic parameters reach critical thresholds warranting intervention.

(4) I will lower money supply. Inflation is poised to go sky-high, fueled by increased consumption, increased investment and as a result, public taking high credit that is a result of high money supply in the economy. The economy is getting "heated up" and a reduction in money supply will cool it down by taming inflation and excess demand of goods and services which cannot be mathched by supply in the short run.

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