1. For each of the following misconceptions about the Fed, identify what is wrong with the statement and why.

a) The Federal Reserve lacks accountability because no one audits the Fed. There's no way to know what really goes on behind the scenes.

b) The Federal Reserve just prints more money when the economy needs it and gives it to the bank.

c) A government agency should not have so much control over the economy because politicians are always just going to do anything to win the next election.

2. Use the Fed rule-of-thumb to predict how the Fed would want to change the federal funds rate and the real interest targets for each of the following scenarios if its estimate of the neutral real interest rate is 2%.

a) A recession hits the economy leading output to be 0.75% below potential output and inflation to fall to 1%.

b) An increase in consumer and business confidence pushes the economy to producing output at 2% above potential output while inflation rises to 3.5%.