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In this assignment you are being asked to evaluate the economic situation described below. You will focus on the role of the Federal Reserve when the economic activity is slowing down, indicating it may be entering the contraction phase of the business cycle and, possibly, a recession.
Assume the economy is entering a recession. The Federal Reserve is faced with the task of trying to stabilize the economy with the tools at its disposal. Unemployment has increased from 5 percent to 9 percent. Inflation has decreased from 4 percent to 1 percent. Gross Domestic Product has decreased in the past two consecutive quarters from (-1) percent to (-1.5) percent, which has caused a contraction in output. Consumer confidence has dropped from eighty-five on the Michigan Consumer Sentiment Index to sixty-seven.
You have read the following two headlines in the news (these are fictional headlines but you might use them in goggle to find real articles);
Market turmoil turns all eyes toward Fed
Economists see dramatic Fed action unless economy improves
The research paper must address the following:
1. Explain the role of the Federal Reserve as the central bank and describe the economic indicators the Federal Reserve will analyze as a basis for its decisions.
2. Describe which monetary policies the Federal Reserve might use to influence the money supply and explain the strengths and weaknesses of using monetary policy in comparison to fiscal policy.
3. Analyze the implications of the Federal Reserve’s actions on the world financial markets.