Monetary Policy-#4

The pitfalls of a strict money supply rule can be avoided if the Fed:

targets nominal GDP growth.

The Fed tried to reduce unemployment in the years following the recession of 2001 by:

keeping the Federal funds rate very low.

The Fed's actions leading up to the Great Recession:

may have contributed to the housing bubble and made the recession worse.

In what way may the Fed have contributed to the housing bubble?

By making credit cheaper with a low Federal funds rate

What was troubling about the 2001 recession?

That the unemployment rate remained high, even after the recession ended.

Most of the Fed's policy tools impact aggregate demand as a whole. Is there any way that the Fed could have targeted the housing market directly in the mid 2000s?

Yes, through its power to regulate banks.

A bubble happens when:

asset prices rise higher and faster than can be explained by the fundamentals.

The economy is:

complex, and it operates under uncertain rules.

One of the problems with a strict monetary policy rule that sets a constant growth rate for the money supply is that, when there are large shocks to the economy, the growth rate of _______, causing real GDP growth to slow down.

the velocity of money can fall

In addition to keeping interest rates too low for too long, the Fed also:

underestimated the impact of a decline in the housing sector on the whole economy.