In 2001, the FOMC lowered the target federal funds rate eleven times, cutting the rate from 6-1/2 percent to 1-3/4 percent. Why didn't the Fed just cut the rate by larger amounts early on?
What will be an ideal response?
There are at least a couple of parts to this answer. One part is that the FOMC does not know how the economy will react to each cut. If the cuts are too aggressive and the economy picks up dramatically, the FOMC could be sowing the seeds for high rates of inflation in the long run. The other is that changes in interest rates by the FOMC need time to work through the links from the operating instrument to the ultimate objective, and this takes time. The FOMC likely wanted to see how the economy would respond to small cuts before taking further action.
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Consider two economies: Barylia and Lithasia. The GDP per capita in Lithasia is $6,000 while the GDP per capita in Barylia is $12,000. Both countries grow exponentially at an annual rate of 10%
How will their GDPs vary over the next year? Is there any limitation of comparing the absolute levels of GDP per capita of both countries over the next years? If yes, what is a plausible solution?
A firm's marginal cost curve
a. is always U-shaped. b. always has a positive slope. c. is always below its average cost curve. d. always intersects its average cost curve at its minimum point.