1. 4. The theory of macroeconomic stabilization policy in this chapter provides a playbook for monetary policy. When the economy is weak, the Federal Reserve eases monetary policy by increasing the money supply and reducing the real interest rate.

When the economy is strong and inflation is rising, the Federal Reserve tightens monetary policy by reducing the money supply and raising the real interest rate. To test whether the Federal Reserve has followed this playbook, get data from FRED on the federal funds interest rate and on expected inflation from the University of Michigan survey of consumers. From those two data series, calculate and plot the real interest rate since 1990. Does the real interest rate usually decline in recessions? Does the real interest rate usually rise as economic expansions are under way?