27. In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began to worry about a “so

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27 In 2003 As The U S Economy Finally Seemed Poised To Exit Its Ongoing Recession The Fed Began To Worry About A So 1 (79 KiB) Viewed 48 times

27. In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began to worry about a “soft patch” in the economy, in particular the possibility of a deflation. As a result, the Fed proactively lowered the federal funds rate from 1.75% in late 2002 to 1% by mid-2003, the lowest federal funds rate on record up to that point in time. In addition, the Fed committed to keeping the federal funds rate at this level for a considerable period of time. This policy was considered highly expansionary and was seen by some as potentially inflationary and unnecessary. a. How might fears of the effective lower bound justify such a policy, even if the economy was not actually in a recession? b. Show the impact of these policies on the MP curve and the AD/AS graph. Be sure to show the initial conditions in 2003 and the impact of the policy on the deflation threat.