Which of the following best describes Federal Reserve policy during the 1961-2019 period?

a. The Fed followed pro-cyclical policy during 1987-2019, but not during 1961-1986.

b. The Fed followed counter-cyclical policy during 1987-2019, but not during 1961-1986.

c. The Fed followed pro-cyclical policy during the whole 1961-2019 period.

d. The Fed followed counter-cyclical policy during the whole 1961-2019 period.

Solutions

Expert Solution

Option B

It was only after the crisis of 1980s that the Fed decided to be counter cyclical, suggesting that it would pacify the overheating economy and stimulate the depressed economy. This would include monetary tightening during expansions and monetary expansions during recessions. This is measured by monetary policy index which shows that during 1961-86, correlation between inflation unemployment difference and real federal funds rate to be negative and during 1987-2015, the correlation was positive.

Rahul Sunny answered 1 year ago

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