To answer these questions, please consider Exhibits A and B provided 1. State/explain the dual mandate of the Federal Reserve. Please make sure to explain the meaning of the mandate, rather than cite the language of the mandate itself. 2. According to the 2006 FOMC statement in Exhibit A, what indicates that inflation could pick up in the future? Please explain how this factor could result in higher prices. Consider the tone of the statement in Exhibit A. After reading this statement, do you think the Federal Reserve would be more likely to increase or decrease the interest rate in the future meetings? Please provide a short explanation. 4. Now consider the second FOMC statement, Exhibit B. The first paragraph describes an interest rate cut. Give one reason based on the statement why the FOMC cut the interest rate. 5. Provide one example or signal from this statement that indicates that the FOMC may consider more interest rate cuts in the future. 6. Consider the last paragraph of Exhibit B. Why was the primary credit rate in the discount window lowered? 7. In Exhibit A (October 2006) the federal funds rate was 5.25 percent. In Exhibit B (December 2007) is federal funds rate is only 4.25 percent. In the second paragraph of Exhibit B, the FOMC states that "Today's action, combined with the policy actions taken earlier, should help to promote moderate growth over time." Note that "Policy actions taken earlier" refers to prior cuts in the interest rate. How would the Federal Reserve implement this interest rate cut (note that this is before the 2008 Great Financial Crisis (GFC))? How does this affect the Federal Reserve's balance sheet? Please explain your answers to both of these questions. 8. Does the action in Question 7 (in pre-GFC setting) change the money supply measured as M2? If so, how? If not, why not? Explain your answer. 9. Exhibit B communicates an interest rate cut. Explain two of the channels through which lower interest rates stimulate consumption by households. 10. Now, turning to the impact of the interest rate cut communicated in Exhibit B on firms (businesses). How do lower interest rates affect a typical firm? Please explain and consider factors such as investment, profitability, and availability of credit. 11. Now, turning to the impact of the interest rate cut communicated in Exhibit B on the financial industry. How do lower interest rates affect banks, including their profitability, equity on the balance sheet, and the supply of credit? Please explain. 12. Going back to the statement in Exhibit B that "Today's action, combined with the policy actions taken earlier, should help to promote moderate growth over time." Discuss why monetary policy works only with a delay.Exhibit A: FOMC Statement, October 25, 2006 October 25, 2006 FOMC statement For immediate release Share The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent. Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace. Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand. Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.Exhibit B: FOMC Statement, December 11, 2007 December 11, 2007 FOMC statement For immediate release Share The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent. Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time. Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans, Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting. In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis