In Tech Federal funds rate

							Noncompetitive division charts and policy questions

•     The following pages provide a range of indicators (listed in alphabetical order) that you can use to
      analyze the economy and create your presentation. The questions that accompany each indicator
      are designed to help you understand and assess the importance of the indicator; the judges will also
      ask you three of these questions during Q&A.

•     The best presentations will tell a story or make an argument. You can use as few or many of the
      charts as you want, in any order you want. You will not want to use ALL the charts – not all will be
      relevant.

•     If you use GDP, inflation, unemployment , or employment charts, you should update them using
      FRED. Other charts may be used as they appear here.

•     It’s advisable to spend time thinking about good answers to the following policy questions; three of
      the policy questions will also be asked of your team.

Policy questions

1.    Some economists argue that the economy is self-correcting and there is no need for active monetary
      policy. Explain their argument. What are the best arguments against this view?

2.    What are the Fed’s most important goals? Explain why each of these goals is important.

3.    Some people think that the Fed’s only goal should be price stability. What are the arguments for and
      against this view?

4.    What is the “output gap” and how does the Fed use the output gap in its monetary policy decisions?

5.    Discuss the concept of NAIRU (non-accelerating inflation rate of unemployment). How should the Fed
      pay attention to the concept of NAIRU in its policymaking?

6.    In making decisions about U.S. monetary policy, in what ways should the Fed take into account the
      health of economies in other countries?

7.    What is the difference between fiscal policy and monetary policy? How does fiscal policy affect
      output. In what ways does fiscal policy affect monetary policy decisions?

8.    How is the policy of raising or lowering the federal funds rate supposed to affect output,
      employment, and inflation?

9.    What tools other than the federal funds rate does the Fed have for affecting the economy and how
      do they work?

10.   Why are forecasts of the economy important to monetary policy decisions? What are some of the
      challenges forecasters face?

11.    What is the role of inflation expectations in determining inflation? How can a central bank influence
      inflation expectations?
Capacity Utilization




1.   Define capacity utilization.
2.   What percent of U.S. capacity is currently being utilized?
3.   How does this compare to capacity utilization when the economy is not in
     recession?
4.   What does this chart suggest about the output gap right now?
Consumer Price Index (CPI) and Personal Consumption
Expenditure (PCE) Price Index, Core




1.   Define the CPI and PCE price indices.
2.   Explain the difference between headline and core measures of
     inflation.
3.   Which measure is higher right now, headline or core inflation? What
     does that tell you about food and energy inflation?
4.   Are these measures consistent with indicators of the output gap?
     Explain.
Consumer Price Index (CPI ) and Personal Consumption
Expenditure (PCE) Price Index, Headline



1.   See the questions for core inflation.
Consumer Sentiment Index
University of Michigan




1.   Why might you be interested in a measure of consumer sentiment?
2.   How would you assess current consumer sentiment? On a scale of one
     to ten, do you think consumers are feeling optimistic or pessimistic?
3.   What important economic variables might this affect in the future?
Dollar – Euro Exchange Rate




 1.   What is an exchange rate?
 2.   According to the graph below, how many dollars does it take to buy one
      euro (according to the latest point on the chart)?
 3.   How many euros does it take to buy one dollar?
 4.   According to the graph below, has the number of dollars it takes to buy
      one euro generally been trending up or down over whole the period
      shown?
 5.   What does the trend tell you about the price of U.S. goods for
      Europeans?
 6.   What does the trend tell you about the price of European goods for
      Americans?
Effective Federal Funds Rate




1.   What is the federal funds rate?
2.   How does monetary policy influence the federal funds rate?
3.   What is the approximate current level of the effective federal funds rate?
4.   Why has monetary policy kept the rate so low in recent months?
Housing Starts
New Privately Owned Housing Units




1.   Describe the recent level and trend in housing starts.
2.   How are housing starts related to interest rates? If monetary policy
     was conducted to raise interest rates, what do you project would
     happen to housing starts as a result?
3.   When people buy new houses, they also tend to buy refrigerators,
     furniture and other items. If monetary policy was conducted to raise
     interest rates, what do you think might happen to housing-related
     consumer spending as a result?
Industrial Production Index




1.   Define the industrial production index.
2.   Has the level of industrial production been rising or falling over the last
     year?
3.   What does this indicate about probable trend in the output gap?
Payroll Employment, Nonfarm




1.   What do trends in payroll employment tell us about the
     current output gap and economic activity?
2.   What might trends in payroll employment tell us about the
     future output gap and economic activity?
Retail and Food Services Sales




1.   Retail sales are a indicator of current consumption spending by
     households. What does the chart below tell you about the likely growth
     of GDP in current and future quarters?
Real Gross Domestic Product (GDP)




1.   Define gross domestic product. What is “real” GDP?
2.   What do changes in real gross domestic product tell us about
3.   Given the evidence in the chart, would you judge the U.S. economy to be
     growing at faster than, slower than, or at about the sustainable rate?
4.   If the U.S. is growing faster than the long run sustainable rate, does that
     necessarily mean that that the Fed should raise interest rates
     immediately? Why or why not?
Trade Balance on Goods and Services




1.   Define the trade balance.
2.   What does the trade balance tell us about the demand for U.S.
     produced goods and services?
Unemployment Rate, Civilian




1.   Define the unemployment rate.
2.   Are full time students unemployed? Retired people? A person who
     has given up looking for a job because he or she doesn’t believe there
     are any jobs available?
3.   What does the unemployment rate tell us about current resource
     utilization and output gap in the economy?
4.   Can you tell the NAIRU from the current unemployment rate?
Unit Labor Cost
Nonfarm Business




1.   Explain what is meant by unit labor cost. How is it calculated by the
     Bureau of Labor Statistics?
2.   During recessions, what tends to happen to unit labor costs?
3.   What do the current measures of unit labor costs say about the
     likelihood of near term inflation?
      Yield on 10-Year Treasury Bond




1.   What is a bond?
2.   What is the relationship between the price of a bond and its yield or
     current market interest rate?
3.   What does the yield on a long term bond such as the 10-year Treasury
     bond tell us about expectations about such things as future interest rates
     and inflation?
4.   How can the Federal Reserve influence long term interest rates? When
     might it choose to do this?