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Use the following graphs to answer the question in your own words:

Imagine you are the policy advisor for the Federal Reserve during this time period. Comparing the graphs during the same windows of dates/years, explain at what point you would advise the Federal Reserve to act (3 points). Using specific information from the graph describe why you would advise them to action at that time (3 points). Give at least 2 steps the Federal reserve might take to regulate the US economy and the expected outcome (4 points). Chose only one time period to describe policy advice.

*Note- Q1 is January-March of any given year, Q2 is April- June of any given year, Q3 is July- Sept of any given year, and Q4 is Oct- Dec of any given year. When answering, make sure you actually specify the year you are referring to.

REMINDER - Absolutely no outside resources are allowed to be used on tests. This includes but is not limited to the use of lessons, notes, internet resources, and artificial intelligence. To do so is a violation of the honor code and will be reported.

1 answer

Based on the context of being a policy advisor for the Federal Reserve, I would suggest that action be taken during the Q2 of 2020, a period characterized by significant economic disruption due to the onset of the COVID-19 pandemic.

Timing for Action

In Q2 of 2020, there is a noticeable decline in economic indicators, such as a sharp increase in unemployment rates and a drop in GDP growth. These figures suggest a rapidly deteriorating economic situation that requires intervention to stabilize the economy. The rapid decline indicates that traditional market mechanisms are failing to address the economic fallout from the pandemic, and immediate action from the Federal Reserve is crucial.

Specific Reasons for Action

  1. Rising Unemployment: Graphs may show unemployment rates skyrocketing, indicating that millions of Americans are losing their jobs. This spike points to a severe contraction in consumer spending and a potential recession if not addressed.

  2. Declining GDP: A steep drop in GDP growth likely presents a clear signal of economic contraction. This dramatic decline signifies that businesses are shutting down, leading to decreased production and further economic distress.

  3. Inflation Concerns: If the inflation rate has also begun to drop or show volatility, this indicates a weakening demand in the economy, necessitating a Federal Reserve response to avoid deflationary pressures.

Proposed Federal Reserve Actions

  1. Lowering Interest Rates: The Federal Reserve could lower interest rates to near-zero levels. This would lower borrowing costs for consumers and businesses, encouraging spending and investment. A reduction in rates can stimulate economic activity, making it cheaper for companies to expand and hire workers.

    Expected Outcome: This action would likely lead to increased consumer spending on goods and services, which would help revitalize demand and contribute to economic recovery.

  2. Quantitative Easing: The Federal Reserve could implement a quantitative easing program to purchase government securities and mortgage-backed securities. This would inject liquidity into the financial system and bolster asset prices.

    Expected Outcome: By increasing the money supply, the Fed would aim to lower long-term interest rates, ease credit conditions, and encourage investment, thereby supporting economic growth during a precarious time.

In summary, advising the Federal Reserve to act during Q2 of 2020 is crucial in response to alarming economic indicators such as rising unemployment and declining GDP. By lowering interest rates and implementing quantitative easing, the Federal Reserve can stimulate economic activity and help stabilize the economy in a critical period.