Define the term structure of interest rates and the yield curve. Explain the importance of each for monetary policy. If the yield curve steepens, does it mean that people expect the Fed to tighten or loosen monetary policy? Your answer should explain why either could be true.

The central bank of a country facing economic and financial market difficulties asks for your advice. The bank cut its policy interest rate to the effective lower bound, but it wasn't enough to stabilize the economy. Drawing on the actions taken by the Federal Reserve during the financial crisis of 2007-2009, what might you advise this central bank to do? Multiple Choice O You should advise the central bank to use unconventional monetary policy tools such as quantitative easing, a policy in which the central bank alters the composition of its balance sheet, or credit easing, where aggregate reserves are provided beyond the level needed to lower the policy rate to zero. The central bank could also inform markets of its commitment to keep Interest rates low (forward guidance). Because the central bank has hit the zero bound with its policy Interest rate, there is nothing further it can do to Influence economic and financial market conditions. In the face of severe economic weakness, you…

Suppose the economy begins at full employment. Label this starting point as point "1." Then, suppose that, due to increased instability in the financial markets, a decrease in investor and consumer confidence occurs. Show the effects on your graph and label the new equilibrium point "2." Lastly, suppose the Federal Reserve wants the economy to return to full-employment as quickly as possible. Should the Fed intervene? If so, show the impact of successful monetary policy on your graph. Label this new equilibrium point "3."

Suppose that the economy is producing above potential GDP and the Fed implements the correct change in monetary policy, but not until after the economy has passed the peak of the boom. Then A) the Fed's contractionary policy will result in too large of a decrease in GDP. B) the Fed's contractionary policy will result in too small of a decrease in GDP. C) the Fed's expansionary policy will result in too small of a decrease in GDP. D) the Fed's expansionary policy will result in too large of an increase in GDP.