Why were traditional Federal Reserve policies ineffective during the 2007-2009 recession?
What will be an ideal response?
The traditional Fed policy response to a recession is to reduce the short-term nominal interest rate. Normally, this will decrease the long-term real interest rate, so long as term structure effects, the default-risk premium, and the expected inflation rate remain constant. This traditional policy could not operate during much of the recession because the target for the federal funds rate had been lowered to near zero by the end of 2008. This forced the Fed to adopt new policies to attempt to increase real GDP and employment.
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The demand for hamburgers is estimated from this theoretical model:
Q = kPaIbAce, where Q = units per day, P = price per unit, A = advertising budget per month by sellers, I = per capita income of consumers, and e = a random error. In a recent study, one researcher estimated the log-linear form of this equation with regression analysis as: log Q = 2.5 - 0.33 log P + 0.15 log I + 0.2 log A. Explain what the coefficients of log P, log I, and log A reveal about this product.
Which of the following groups has the lowest life expectancy at birth?
a. middle-income economies b. low-income economies c. high-income economies d. sub-Saharan African economies e. all the world's economies