Read the following article: http://www.economist.com/news/briefing/21688919- plunging-prices-have-neither-halted-oil-production-nor-stimulated-surge-global-growth. Then answer the following questions. a)The world economy is not experiencing the boom that was expected from lower oil prices.

Use all of the FRED graphs you have created thus far in the semester as references to help write the following essay. If you would like, you may also look for extra data on FRED (such as house prices, mortgage default rates, consumer confidence, etc.) to support your argument. The essay should not contain any graphs, but should instead rely on specific numerical values. Please use the most recent values available on FRED for your analysis. In a one to two page essay, write a policy recommendation for the FOMC’s next meeting on December 13th and 14th. This recommendation must be supported by data from FRED. Indicate if you believe the FOMC should conduct conventional monetary policy (change the FFR target, discount rate, deposit rate, and/or the required reserve ratio) or use unconventional policies (policy duration commitment, quantitative easing, credit easing, and/or targeted asset purchases). Your policy recommendation should be specific (say exactly what you would recommend), and be supported by at least three pieces of numerical evidence. This essay may NOT be written in groups; any duplicate essays will receive a grade of zero on this homework assignment.

2) (24 Points) Starting with the economy in long-run equilibrium, explain what would happen to output and inflation in the short and long run as a result of each of the following shocks. a) Consumers suddenly feel more optimistic about the future, but only temporarily. b) The government raises taxes permanently; the Federal Reserve keeps the target inflation rate the same. c) The Federal Reserve lowers the target inflation rate. d) Potential output grows; the Federal Reserve uses the opportunity to lower the target inflation rate. Babson College ECN 3615 Page 2 of 2

3) (20 Points) Read the following article: http://www.economist.com/news/briefing/21688919- plunging-prices-have-neither-halted-oil-production-nor-stimulated-surge-global-growth. Then answer the following questions. a. It has been assumed that temporary drops in the price of oil would boost global economic output. If we assume the global economy starts in long run equilibrium, which curve is supposed to shift to give us this temporary boom? b. Instead of a boom, Russia is experiencing a recession because of the drop in the price of oil. Use the general equilibrium model to explain what is happening in Russia. c. The world economy is not experiencing the boom that was expected from lower oil prices. Explain what is happening according to the article. Use the model from class to assist in your explanation. d. As the price of oil falls, what is the impact on the stock market? Explain your answer. e. Based on your answer to part (d), what should happen to consumption demand? How does this impact global output?

 

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