1. Suppose you are the Fed chair. The economy is experiencing inflation at a time of full capacity. You use the Taylor rule. Inflation is currently at 10%. The Fed's target inflation rate is 2%. The economy is operating at 1% above its potential. What level of fed funds would you prescribe?

2. Given the above data, and further suppose the current fed funds rate is 4%, specify at least 3 toolsyou would employ, and how you would employ them to achieve your goal.

3. What is a liquidity trap? What phase of the business cycle would you expect to encounter this?

4 Suppose that the target range for the federal funds rate is 4.75 to 5.0 percent but that the equilibrium federal funds rate is currently 5.25 percent. Assume that the equilibrium federal funds rate falls (rises) by 1 percent for each $120 billion in repo (reverse repo) bond transactions the Fed undertakes. If the Fed wishes to move the equilibrium federal funds rateto the bottom end of the target range, will it initiate repos or reverse repos of bonds to nonbank financial firms? How much will it have to repo or reverse repo?