It May Be Time for the Fed to Go Negative by N. GREGORY MANKIW

• The following article by the Harvard economist, Gregory Mankiw, was published in the New York Times on Sunday April 19th, 2009 during the last recession as the Federal Reserve continued implementing expansionary monetary policies that pushed the Federal Funds Rate to almost 0%. It seemed that the interest rate was not low enough to stimulate enough spending on Consumption and Investment. Read the article and answer the following two questions: 1) Explain what Mankiw means by the title: “It May Be Time for the Fed to Go Negative” 2) According to Mankiw the Federal Reserve could create a situation that leads to negative real interest rates – explain how this is possible. (He mentions at least two ways of doing so – briefly describe the two methods).

Sample Solution