Fed Challenge Questions (asked of previous teams during national competition)
Questions Based Upon the Presentation
• If this economy is really different from what we are used to, why not just wait and see if inflation is actually
going up before raising rates?
• In your presentation, you implied that it is wrong to base monetary policy on asset values. Elaborate as to
why.
• You mentioned that raising rates hurts investment and productivity. Should the Fed then never raise rates?
• If the Fed were going to shift bias as you mention, wouldn’t it make sense to just raise rates instead of just
talking?
• There have been bills in Congress to make the Reserve Bank Presidents political appointees. What impact
would this have on monetary policy?
• Explain why NAIRU theory supports your decision to raise rates.
Interpretive Questions
• What should be the main objective of the FOMC when it sets monetary policy?
• Does the Fed have any control over employment?
• Is there a difference between short-term and long-term interest rates? Does the Fed affect both?
• Are trade deficits a bad thing and should the Fed worry about them?
• Is deflation worse than inflation? Is it a good thing or a bad thing?
• Do the Fed's monetary policy actions affect long-term interest rates? Why or why not?
Hypothetical Questions
• If the Fed could achieve 0.5% less unemployment by accepting another 1% of inflation, would that be a
good thing?
• What will the impact of a budget surplus be on the U.S. economy?
• The Fed does not have a mandate from Congress for a specific inflation rate target. Would you be for or
against such a mandate and why?
• On the fiscal policy side, how would the passage of a federal balanced budget measure affect the Fed’s
monetary policy decisions? Do you think balancing the federal budget is an important goal?
Program Evaluation Questions
• What did you learn from participating in the Fed Challenge?
• Why did you choose the economic indicators you used today and not others?
Questions Posed to Finalists in the 2003 National Fed Challenge (paraphrased):
• What’s so bad about deflation?
• How can monetary policy stimulate investment?
• Confused about weakness in the labor market – why are we concerned when numbers are actually fairly
low?
• How do you define the natural rate of unemployment?
• What’s more important to look at – unemployment or employment rate?
• What has been happening to total employment?
• Budget deficits – should they be worried and what is approach/goal of fiscal policy? Cyclical dimensions?
• Should we be looking for stronger/weaker dollar? What should our policy be?
• How does the actual Fed Funds rate get set on a day-to-day basis?
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• Longer rates – alternate monetary policy – haven’t they had a role in monetary policy the last few years?
• Views on inflation targeting?
• Labor market – is it bad or not? Didn’t talk much about it in your presentation.
• What’s been happening to US productivity – what impact has that had?
• Can inflation be too low?
• What the legal basis for the Fed’s independence? Are they really independent?
• Goal of sustained level of consumption…what did you mean by that?
• What would happen over time if consumption and investment were sustained over time?
• Could you imagine getting too much growth – would there be a level that would worry you?
• What would be the implications of zero inflation?
• Why can’t employment of 4% be sustained?
• What’s your forecast for inflation for next year?
• Should monetary policy be turned over to the computer/automated?
• Unemployment – goals – where should unemployment be? How would know if it goes too low/too high?
(NAIRU)
• What’s the connection between refinancing ones wealth/restructuring balance sheets?
• In a situation like September 11, what role does the Fed have
• Oil prices – when declines, add to consumer incomes – doesn’t it just come from producers – just a
transfer?
• Is focus of international trade exports or imports?
• What’s going on with finances of state governments?
• Inflation – should we try to get inflation as low as possible? Upsides and downsides?
• How does deflation hurt the banking system?
• Don’t you think EU is having to be too tight now because of their inflation targets?
• Mortgage refinancing – how can Fed affect long-term rates?
• Productivity – what has been going on there, and what is its relationship to inflation?
• Connection with productivity and employment?
• What are the implications of this for long-run standard of living?
• Oil prices – suppose we had spike? Should Fed respond by tightening/easing?
• How can we tighten policy loopholes?
• Productivity – production up, employment down – is productivity good? Short-run vs. long-run? How do you
reconcile? What happens to those who lose jobs because of productivity gains?
• Exchange rate of dollar internationally and connection with inflation? Should we drive down the dollar to
help exporters?
• What would you look at to know if the dollar is at an appropriate level?
Questions Posed to 2004 National Finalists (paraphrased):
• What are fan charts? Why don’t you favor using these?
• What’s the best approach – an inflation-targeting central bank or a non-inflation targeting central bank?
Why?
• Suppose the FOMC would increase the Fed Funds rate target by one quarter percent. How would the Fed
go about achieving that?
• Related to the importance of job creation, what’s the relationship between that and the unemployment rate?
• If Chairman Greenspan coughs or raises his eyebrows, it seems he can affect markets. Why do you think
Greenspan’s statements and looks have such an impact?
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• If you recommended no change to the Fed Funds rate, what developments in the economy would you need
to see to come to a different conclusion?
• Is the Fed independent? If so, does it matter?
• You made reference to the need for transparency and credibility with the FOMC; should we think about
setting specific inflation targets? What are the pros and cons?
• What do you think the Fed should be aiming for in terms of price stability?
• There is a very large current account deficit. Does that pose a threat for US monetary policy?
• How should the Fed respond to an increase in oil prices?
• Why are changes in the wording of the FOMC’s public statement so closely watched?
• What do you look at to determine what inflation looks like?
• In terms of the potential growth rate of our economy, how do we know how much we can grow?
• How important are commodity prices in your considerations?
• Let’s talk about outsourcing. How do you judge the importance of jobs lost this way relative to other factors?
• Treasury long-term bonds have risen since the last FOMC meeting. Why is this the case if the FOMC didn’t
change the Fed Funds rate?
• Define the output gap. What would you use this for?
• Is the Fed independent? Are we accountable to anyone?
Other Questions:
• How does the existence of sweep accounts impact Fed policy?
• Is the Phillips curve dead?
• Should the Fed use pre-emptive strikes when conducting monetary policy, where they react before they
actually see trouble?
• Should the Fed react quickly to economic shocks or take a gradual approach?
• Has the economy become more interest rate sensitive? Why or why not? If yes, how should the Fed deal
with this problem?
• Should the Fed react to fluctuating asset prices?
• Why does a cut in the Fed funds rate have an impact on the economy? Very few people even know what it
is? How do changes in the fed funds rate get transmitted through the economy to affect consumption,
investment, and net exports?
• Is the increase in productivity that we have seen in the late 1990s structural or cyclical? Was the increase in
output in the late 1990s the result of increased growth in the natural level of output or simply an increase in
actual output above the natural level? What are the long-run implications for monetary policy? How does
productivity help the Fed in its fight against inflation?
• Could the Fed have done more to prevent the over investment in the late 1990s? Should they have?
• To what degree should the Fed respond to external events such as increases in oil prices or the
depreciation of the US dollar?
• Should we be worried about deflation? If so, why?
• Explain how the effect of monetary policy on the economy is long and variable. Think about how monetary
policy is like turning an oil tanker into dock. It takes a long time to make an adjustment so you better do it
early.
• Should the US adopt inflation targeting like other countries? Why or why not?
• How should the Fed respond to increases in US budget deficits?
• Should the Fed be worried about the large US trade deficits? How should they respond?
• Should the Fed be concerned about the level of US corporate debt and consumer debt? If so, why, and
what can they do about it?
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