1. Suppose that you are a member of the Board of Governors of the Federal Reserve System and the economy is experiencing an 8 percent inflation rate. Unemployment is at the full-employment level and the target interest rate is currently 4 percent. What change in the target interest rate would you want to make? How would this change implement? What impact would those simple implementation actions have on the lending ability of the banking system, the real interest rate, investment spending, aggregate demand, and inflation?

2. How does each of the following relate to the financial crisis of 2007-2008: declines in real estate values, subprime mortgage loans, and mortgage-backed securities?