In 2007 there was a dramatic decline in housing prices. This caused people to feel worried about the value of their assets (housing) and the state of the economy and the response was a sudden drop in aggregate demand (both C and I) pushing the economy into a very large recession. What was the response of the central bank to this sudden decline? Specifically, what did they do to their target range for the federal funds rate and why?

What kind of Monetary Policy could the Federal Reserve Board use to fix an economic situation where: Unemployment is at 6% and has increased steadily the last 6  months. GDP growth fell to 0.2% last quarter, and is expected  to be negative this quarter.

Inflation-indexed bonds Some bonds issued by the U.S. Treasury make payments indexed to inflation. These inflation-indexed bonds compensate investors for inflation. Therefore, the current interest rates on these bonds are real interest rates—interest rates in terms of goods. These interest rates can be used, together with nominal interest rates, to provide a measure of expected inflation. Let’s see how. Go to the Web site of the Federal Reserve Board and get the most recent statistical release listing interest rates (www. federalreserve.gov/releases/h15/Current). Find the current nominal interest rate on Treasury securities with a five-year maturity. Now find the current interest rate on “inflation indexed” Treasury securities with a five-year maturity. What do you think participants in financial markets think the average inflation rate will be over the next five years?  

The Federal Reserve has decided to sell treasury bonds on a regular basis over the next few weeks. Identify by name and describe in detail the specific tool that is being used by the Federal Reserve, and then based on what it is doing, explain whether you would recommend borrowing at this time or waiting until later, and explain why.