Q. 2 A measure of real interest rates... [FREE SOLUTION]

Chapter 22: Q. 2 (page 584)

A measure of real interest rates can be approximated by the Treasury Inflation-Indexed Security, or TIIS. Go to the St. Louis Federal Reserve FRED database, and find data on the five-year TIIS (FII $5$ ) and the personal consumption expenditure price index
(PCECTPI), a measure of the price index. Choose 鈥淨uarterly鈥� for the frequency setting for the TIIS, and choose 鈥淧ercent Change From Year Ago鈥� for the unitssetting on (PCECTPI). Plot both series on the samegraph, using data from $2007$ through the most currentdata available. Use the graph to identify periods of autonomous monetary policy changes. Briefly explain your reasoning.

Short Answer

Expert verified

The most significant developments in the monetary economy occurred with the crises of $2007$ and $2020$ .

The inflation rate curve and the federal funds curve both fell after the crisis and the Fed's initiatives to lower federal funds rates.

Step by step solution

Introduction

The monetary policy is carried out by the Central Bank which the apex monetary authority in an economy. Controlling inflation, increasing employment, and lowering long-term interest rates are the three most essential goals of monetary policy.

Graph

The red line shows PCECPTI while the blue line shows FII5. The shaded areas indicate recession in US.

Explanation

The periods where the inflation rate and real interest rates change in different directions indicate periods of autonomous monetary policy change. In 20007-08, the real interest rate declined while the inflation rate increased. This indicates an autonmous expansionary policy.

From mid-2009 to mid-2011, real interest rate declined while there was a steady increase in the inflation rate. It is an indicator of autonomous expansionary policy. The perods where both inflation and interest rate fell indicates a movement on the MP curve as the policy reacted to changes in inflation.