2015 High School Fed Challenge: Key Questions

Teams competing in the Liberty Street division are strongly encouraged to think through answers to the following advance policy questions:

  • Some economists argue that the economy is self-correcting and there is no need for active monetary policy. Explain their argument. What are the best arguments against this view?
  • What are the Fed's most important goals? Explain why each of these goals is important.
  • Some people think that the Fed's only goal should be price stability. What are the arguments for and against this view? What is the "output gap" and how does the Fed use the output gap in its monetary policy decisions?
  • Discuss the concept of NAIRU (non-accelerating inflation rate of unemployment). How should the Fed pay attention to the concept of NAIRU in its policymaking?
  • In making decisions about U.S. monetary policy, in what ways should the Fed take into account the health of economies in other countries?
  • What is the difference between fiscal policy and monetary policy? How does fiscal policy affect output? In what ways does fiscal policy affect monetary policy decisions?
  • How does the policy of raising or lowering the federal funds rate affect output, employment, and inflation?
  • What actions can the Fed take to stimulate the economy when the federal funds rate is close to zero?
  • The Federal Reserve has used nontraditional policies in the wake of the 2008 crisis, resulting in an expansion of the Fed's balance sheet. What are the risks of these nontraditional policies and what are some exit strategies?
  • What is the role of inflation expectations in determining inflation? How can a central bank influence inflation expectations?
High School Fed Challenge Finals Questions, 2013-2014
  • There are several indicators that measure the labor market. Some measure unemployment, others measure labor force participation rate, labor demand or job loss. Which indicator(s) should the Fed follow to assess the health of the labor market and help guide monetary policy decisions?
  • The Fed has a dual mandate, but an alternative for monetary policy is to exclusively target the inflation rate like other central banks do. What difference would inflation targeting make in the U.S. economy under current conditions? Why?
  • Since December 2008, the Fed has purchased a large amount of Treasury bonds and mortgage-backed securities to support the healing of the economy. These purchases have caused concerns that the Fed could incur significant losses when interest rates rise. Please assess these concerns.
  • In a recent statement, Governor Jeremy Stein said: Financial stability matters “insofar as it affects the degree of risk around the employment leg of the Federal Reserve’s mandate.” Explain the relationship, if any, between monetary policy and financial stability.
  • There has been a lot of talk about inflation expectations in the last years. What are they and what role do they play in the inflation process?
High School Fed Challenge Finals Questions, 2012-2013
  • Why would the Fed want to raise inflation expectations when short-term interest rates are near zero?
  • How does the Large Scale Asset Purchase program boost economic growth?
  • In October 2012, the FOMC indicated that the federal funds rate would likely stay low at least through mid-2015. Three months later, it said that the federal funds rate will stay low at least as long as the unemployment rate remained above 6-1/2 percent and expected inflation was projected to be no more than a half percentage point above 2 percent. What was the rational for this change?
  • Assume inflation is stable at 2 percent, but home price inflation is at 10 percent and accelerating. Do you think this development should cause the Fed to tighten policy?
  • The health of the labor market can be measured with the unemployment rate or the employment-to-population ratio. Which one should the Fed follow if they start moving in opposite directions?
  • It has been nearly four years since the official end of the recession yet the pace of the expansion remains sluggish and the unemployment rate remains relatively high. What factors are responsible for this slow recovery?
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