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Q1 Distinguish between the Federal funds rate and the prime interest rate. Why
is one higher than the other? Why do changes in the two rates closely track one
another?
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Q2 Suppose that you are a member ofthe Board of Governors ofthe Federal
Reserve System. The economy is experiencing a sharp rise in the inflation rate.
What change in the Federal funds rate would you recommend? How would your
recommended change get accomplished? What impact would the actions have on
the lending ability of the banking system, the real interest rate, investment
spending, aggregate demand, and inflation?
Q3 What do economists mean when they say that monetary policy can exhibit
cyclical asymmetry?
Why is this possibility significant to policymakers?
Q4 How do mortgage backed securities work? Why did banks think that selling
mortgage backed securities would relieve them of the risks involved with mortgage
lending? How did the banks indirectly come to once again be exposed to mortgage
lending risk? What happened to bank reserves during the mortgage debt crisis?
How did the Fed respond?
