Finance 462

Money & Banking

Final Paper:  Due Friday, December 17th

Imagine that you are a staff economist for the Federal Reserve Open Market Committee (FOMC).  You’re job is to present a five page brief to the open market committee regarding the policy decision to be made at the May 3rd  meeting. 

Currently, the Federal Reserve is targeting the federal funds rate at 2.75%.  You need to present a policy recommendation for the target federal funds rate over the next two months (the next meeting is June 29, 2005). 

You’re report should include the following:

1)      A specific statement of the new policy to be followed (i.e. should the federal funds rate be lowered or raised and, if so, by how much).  The should be followed up by a discussion of the current state of the economy (i.e. back up your decision).  Note that project #4 will be useful for this question.

2)      Given your answer to part (1), you need to describe the proper implementation of the recommended policy. 

a.       How will T-Bill rates be affected? (Project #1 will be useful for this question)

b.      Given (1) and your answer to (2a), how will M2 money demand be affected?

c.       What is the current M2 multiplier?

d.      Given your answers to (a), (b), and (c), what open market operation will be needed to implement your policy?

3)      Given your answer to (1), how will the term structure of interest rates be affected (i.e., what will happen to the yield curve)? Does your answer depend on future policy

You should include in your report all your data to support your policy decision.