Imagine you are an economist at the Federal Reserve Bank of San Francisco. You are preparing a

memo on policy suggestions for the president of the Reserve Bank, Mary C. Daly, who will help

decide the direction of future monetary policy.

Examine the economic scenario below and make a policy recommendation:

State of the Economy: The inflation rate has been above 2% for quite some time. The most recent

data show an inflation rate of 4%. At the same time, you are hearing employers complain about

having a difficult time finding qualified workers to fill positions and having to raise wages and

benefits to lure workers from other businesses. Meanwhile, the unemployment rate has fallen to a

very low level.

a) Should the FOMC pursue expansionary or contractionary monetary policy?

b) Identify the monetary policy tools and how they can be used to pursue the policy

recommendation. Specifically, describe how use of the tools will influence the federal

funds rate, interest rates in general and economic activity.