The Federal funds rate is the main interest rate targeted by U.S. monetary offic

Question

The Federal funds rate is the main interest rate targeted by U.S. monetary officials. The curve on the following graph shows the path of the Federal funds rate target for the year 2006. Note that the horizontal-axis labels for the month appear at the end of the relevant month, so the final unit of 12 is shown at the end of December. FEDERAL FUNDS RATE TARGET (Percent] 5.5 3.3 2.2 0.0 4 MONTH OF 2006 Which one of the following choices best explains the reason why the Federal Open Market Committee chose the path for the Federal funds rate target in 2006 that is shown above? O The U.S. economy expanded rapidly, largely due to a boom in technology investment and productivity. O A mortgage debt crisis expanded into a wider financial crisis O The economy was experiencing strong, noninflationary growth. O A financial crisis erupted in Southeast Asia The effectiveness of monetary policy actions, such as adjusting the Federal funds rate target, may have an asymmetric ability to impact the economy. severe recession, a mild recession, a typical expansion, a robust expansion This illustrates the fact that can be an extremely difficult environment for monetary officials to influence economic growth and inflation rates.

Explanation / Answer

Question 1: The Right answer is option 2: A mortgage debt crisis expanded into a wider financial crisis.

Explanation: The Federal funds rate is the rate at which banks charge each other for lending to maintain required reserves. The Federal funds rate is a very important monetary policy tool to control inflation and ensure healthy economic growth. When the economy faces inflationary pressure, the Fed increases the federal funds rate to tame inflation. The Fed increased the Federal funds rate 17 times between 2004 and 2006 to cool down a building housing market bubble in the USA.

Answer 2: A typical expansion

Explanation: A typical expansion is accompanied by inflationary pressure. If the funds rate is not hiked, it might cause high inflationary pressure. However, if the rate is hiked, it can hurt the growth of the economy. So, this becomes a tricky situation in case of a typical expansion.

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