Consider the following scenario. On November 1, 2013 the incoming Federal Reserve, Chairperson Janet Yellin expresses unhappiness to the NY Times with the disappointing employment outcomes of targeting the Federal Funds Rate. She announces that the Fed will soon set a target based on the Prime Rate instead. The target for the Prime Rate will be 80 basis points below the current published WSJ Prime Rate.
a. How has the unemployment rate been affected over the past two years by the Fed's policy of quantitative easing? Be specific.
b. What will be the Feds target for the Prime Rate? What do you think will be the results on employment of using this new target for monetary policy?
c. Discuss the pros and cons of using each major tool of monetary policy in achieving and managing this Prime Rate target? What tool(s) do you recommend to Fed Chairperson Yellin?