Interest Rate Papers

Topic: Explain what the Federal Open Market Committee did with Fed Funds rate (at the late October meeting). Your paper should include
- A description of the Fed Funds rate (about one sentence). A description of how the Federal Open Market Committee of the Federal Reserve affects the Fed Funds rate and what it is used for (about one sentence). A description of what is its impact on the economy (about one sentence).
- A description of the current state of the economy, as is perceived by the Federal Open Market Committee (about two paragraphs).
  - Make sure to discuss the FOMC's opinions on the growth rate of GDP, the rate of unemployment, and the rate of inflation.
  - If the FOMC's statement doesn't address one or more of these indicators explicitly, try to identify what their implicit opinions are (from what they say explicitly).
  - Use the AS-AD model to explain the current situation. The paper will not be accepted without an AS-AD graph.
    - Does the FOMC think that the economy currently exhibiting a recessionary gap? An expansionary gap? Is the economy at full-employment output (potential output)?
    - Given your judgment on whether there's an output gap, and on the kind of output gap that there is, what can be expected to happen to inflation over the next year?
- A description of how the FOMC's actions address the current state of the economy (that is, "they did this to the rate because inflation is X and GDP growth is growing at a rate g, and this makes sense because ...") (about one paragraph).
  - Use the AS-AD model to explain the how the FOMC's action will affect the economy. The paper will not be accepted without an AS-AD graph.
    - What curve is shifted by FOMC's actions in general?
    - Show in the graph how the FOMC's recent action addresses current situation, focusing on output, unemployment, and inflation.
- A description of what Wall Street Journal commentators and Economist magazine commentators think of the FOMC's action (about one paragraph). Make sure to show that their opinions are based on how they perceived the current state of the economy.
Sources:
- Study both the FOMC's Statement from the late October meeting and the minutes of the FOMC meeting in mid-September (released in early October). To obtain this information, google "FOMC meetings".
- On the Wall Street Journal, www.wsj.com, look
  - for articles (particularly in the "Business" section, under "Economy") and
  - for blog posts and columns, under "Columns and Blogs".
- On the Economist, www.economist.com, look
  - for articles, both in the main section and in the Economics and Finance section.

1.5 pages, double spaced, Times New Roman, font size 12. The AD-AS graph does not count as part of the 1.5 pages.

Check the course calendar for the due date.

No late papers allowed.

For guidance on professional writing, see the Writing Guide

A Recommendation for Action Regarding the Fed Funds Rate.

Components of the paper:
Part 1:	The current state of the economy, focusing on inflation, unemployment, and GDP growth. (2-3 paragraphs)
	a)	Describe the current state of the economy based on recent FOMC meeting minutes (see below). You can also base your argument on arguments from newspapers and econ-blogs (see below), which you should cite. Cite your sources. (1-2 paragraphs)
	b)	Illustrate the current state of the economy with an AS-AD graph, showing if the economy is in a recession, at full employment, or over-heated. Given the output gap, show in your graph (and describe in words) your expectations for inflation over the next year or so.
	c)	Present quantitative evidence of your assessment.
		i)	Show a graph of actual data for inflation.
			http://research.stlouisfed.org/fred2/series/CPILFESL/9 gives you the level of the “core” CPI. From this, calculate inflation.
		ii)	Show a graph of actual data for GDP growth.
			http://research.stlouisfed.org/fred2/series/GDPC96/106 gives you the level of the Real GDP. From this, calculate its growth rate.
		iii)	Show a graph of actual data for unemployment.
			http://research.stlouisfed.org/fred2/series/UNRATE?cid=12 gives you lots of years of data: make sure to limit your graph to a reasonable period of time (e.g., ten years), making note of the implications of the most recent evolution of the indicator.
Part 2:	State your expectations for the economy, presenting evidence for your view. The FOMC minutes will be particularly useful here. Given what you expect, do you think the FOMC should cause the economy to speed up, to avoid a recession? Do you think the FOMC should cause the economy to slow down, to avoid over-heating? Your argument should be coherent and well structured. (3-4 paragraphs)
Part 3:	Conclude by making a Fed Funds recommendation. (1-2 paragraphs)
		Based on your data and arguments for the current output gap and desirable FOMC policy, suggest what the FOMC should do with the Fed Funds rate. Illustrate your recommendation on an AS-AD graph, by drawing shifting the appropriate curves. Be sure to draw the short-run and the long-run effects of action and of inaction.
Sources:
	Study both the FOMC's Statements and the minutes from recent meetings. To obtain this information, google "FOMC meetings". Newspapers and the “blogosphere” will be full of discussion of what the Fed should do, what it did, and why. Wall Street Journal www.wsj.com, Financial Times www.ft.com, The Economist www.economist.com, New York Times www.nytimes.com. Economics resources, such as http://www.rgemonitor.com/ http://www.briefing.com/Investor/Private/OurView/TheBigPicture.htm Econ blogs (especially those listed in on the right-hand side bar of http://thecopperclub.blogspot.com/), such as http://macroblog.typepad.com/macroblog/ http://williampolley.com/blog/ http://calculatedrisk.blogspot.com/ http://www.morganstanley.com/GEFdata/digests/latest-digest.html
In this paper,
	show that you are able to use economic theory and methods to explain and predict economic events and facts (i.e., the likely course of the economy and therefore the needed monetary policy) and
	show that you know how to make an effective argument based on evidence.

Use the AS-AD model to justify your recommendation. The paper will not be accepted without an AS-AD graph.
2 pages, double spaced, Times New Roman, font size 12.
Check the course calendar for the due date.
No late papers allowed.
For guidance on professional writing, see the Writing Guide.pdf