Read the statement by Jerome Powell, Chair of the Board of Governors of the Federal Reserve System before the Joint Economic Committee . Mr. Powell says that “Putting the federal budget on a sustainable path would aid the long-term vigor of the U.S. economy”.
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1. On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was passed, cutting the tax rates for corporations very significantly from 35% to 21%.
(a) Using the IS-MP framework, describe what happens to investment and short-run output when there is a large cut in corporate taxes.
(a) The FRED database contains data for Real Gross Private Domestic Investment showing the change in investment year-on-year. Use the FRED database and download the time series. Use quarterly frequency.
(b) In general, has the investment become more or less volatile since 1950?
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1. Inflation is usually understood to mean positive inflation – i.e., an increase in the general price level over time. Given this, what do you think “deflation” means?
2. Using the Fisher equation, describe why deflation can be dangerous. In the context of a recession, explain how a potential “deflationary spiral” would work.
3. If you were the Fed Chairman, how would you respond to deflation?
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