Consider the following scenario. on November 1, 2012 the Federal Reserve, unhappy with the employment outcomes of targeting the federal funds rate, decide to set a target based on the Prime Rate instead. The target will be 50 basis points below the current published WSJ Prime Rate.
a. 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?
b. Discuss the pros and cons of using each major tool of monetary policy in achieving and managing this Prime Rate target? What tool do you recommend to Fed Chair man Bernanke?