Answer all 4 questions below. Clearly identify question # for each answer. Answers must be typed, double space in font 12. Place your name on the top right corner of all pages. LIMIT YOUR ANSWERS TO ONE PAGE. Please hand drawn all graphs.

 

 

 

1.      In a local shoe factory, machinery used are outdated and takes too much labor and time to make a pair of shoes.  Inexpensive imports are flooding the market and it is increasingly hard to compete with imported shoes on price that also includes the imbedded quality. Briefly discuss steps the management can take to improve price competitiveness and show with economic models (graphs) your ideas.You must include economic graphs to demonstrate your point.

 

2.      In light of low economic growth, (A) some argue that we need businessincome tax cuts and removal of regulations to spur higher economic growth,(B) others support tax cuts for the middle and high income households. Yet (C) there are others who argue in favor of a mix policy of select industry subsidies (solar and wind energy and battery storage technology), spending on education and infrastructure. Using Aggregate Demand-Aggregate Supply (AD-AS) model, compare and contrast the impact of each position (A, B, and C) on real output (and employment) and price-level. (Use a separate model/graph for each case). Remember that some policies are aimed at supply-side and others are at demand-side or both.

 

 

3.      Using AD-AS model show the impact of the following phenomenon on real output and price-level on one model and label as A,B,C,etc.… Very briefly explain your answers:

A.    Low unemployment

B.     Increase in exports

C.    Falling oil and other energy prices

D.    New innovations

E.     Falling interest rates

4.      In the article below, Janet Yellen, the Fed’s chair, has expressed views on the economy and speculation that the Fed might hike the interest rate sooner than expected. The statement about interest hike pushed Dollar up (appreciate) against major currencies. Please read the article below and web search on Yellen’s comments and explain why possible higher interest in the U.S. can push the price of U.S. Dollar higher. (Hint. Value of Dollar is determined fundamentally in the same way that the price of potatoes are determined in the market)

Economy

Fed's Yellen Hedges Her View on Rates

Easy-Money Policies Appropriate, but Sooner Hike Than Expected Is Possible if Job Market Quickly Improves

 

Mark Brennan of New York University's Stern School of Business joins MoneyBeat with analysis of Federal Reserve Chairwoman Janet Yellen's testimony before the Senate Banking Committee. Photo: Getty Images.

Federal Reserve Chairwoman Janet Yellen defended keeping interest rates low before Congress on Tuesday, but opened the door a crack to earlier-than-planned rate hikes if the labor market continues its surprising improvement.

"If the labor market continues to improve more quickly than anticipated by the [Fed]," she told the Senate Banking Committee, "then increases in the federal-funds rate target likely would occur sooner and be more rapid than currently envisioned." The Fed has held its benchmark short-term rate near zero since late 2008.

While continuing to stress that "a high degree of monetary policy accommodation remains appropriate," Ms. Yellen's acknowledgment that rates could rise sooner than planned marks a notable new hedge. She made a similar comment at a news conference in June, but without pointing out that the unemployment rate and other job-market measures were improving more quickly than officials expected.

Ms. Yellen's testimony Tuesday, the first of two days of hearings on the economy and monetary policy, was her first update on the economy since an unexpectedly strong Labor Department report earlier this month showed the unemployment rate dropped to 6.1% in June and businesses expanded payrolls by a robust 288,000. The jobless rate is down from 7.5% a year ago and payrolls have grown on average by 230,000 a month during the first half of the year.

Fed chairwoman Janet Yellen is still cautious about the strength of the economy. Roger Bayston, Franklin Templeton senior vice president, offers analysis, plus looks at the impact on mortgage-backed securities markets on the News Hub with Sara Murray. Photo: Getty Images.

In December officials didn't expect to see the jobless rate near 6% until late 2015.

Some of the Fed's 12 regional bank presidents have argued recently the central bank should turn its eyes toward raising short-term interest rates as the job market improves, turning up the volume on an internal Fed debate about the timing of rate increases.

"Today's economy, with a strengthening labor market and rising inflation, is ready for a more-normal rate environment," Kansas City Fed President Esther George said in a speech Tuesday night. "Waiting too long may allow certain risks to build that if realized, could harm economic activity."

Federal Reserve Chairwoman Janet Yellen discussed how the U.S. economy is continuing to make progress toward the Federal Reserve's goals of maximum employment and price stability in her semiannual report to Congress on Tuesday. Photo: Getty

Ms. Yellen didn't embrace that stance in Tuesday's testimony.

She pointed to low levels of labor-force participation and slow wage growth as signs of continued "significant slack" in the job market.

In answers to senators' questions, she added the Fed has been fooled in the past during this economic recovery by "false dawns."

"We need to be careful to make sure the economy is on a solid trajectory before we consider raising interest rates," she said in response to one senator's question.

"She was pretty clear that not all of the pieces were in place" to begin raising rates, said Lewis Alexander, chief U.S. economist with Nomura Securities, in response to Ms. Yellen's testimony. "The principal missing piece was wages." Wages are a kind of pressure gauge on the labor market. When the supply of available workers gets squeezed, wages should rise. A pickup in wages would thus signal the labor market is heating up, something Mr. Alexander said he isn't yet seeing.

Ms. Yellen's review of the economy was carefully hedged at almost every turn. While a number of recent economic indicators point to a rebound in growth after the first quarter, housing has shown little progress and the broader recovery "bears close watching," she said. Her comment about rates was also balanced with the warning that an unexpected slowdown could lead the Fed to keep rates lower for even longer.

"Although the economy continues to improve, the recovery is not yet complete," she said. Moreover, while inflation has moved up, she said officials expected it to remain below the Fed's 2% goal for the full year.

Even if the Fed does move sooner than planned, it still looks many months away, and likely incremental once begun. Most Fed officials don't expect to start raising short-term rates until next year, according to projections they made going into their June policy meeting. Those projections, which Ms. Yellen noted as an indication of their recent intentions, show officials expect to raise their benchmark rate to 1% by the end of next year. Many officials have affirmed investors' belief that the Fed won't start rate increases until about the middle of 2015.

For now, the Fed is scaling down its monthly purchases of mortgage and Treasury bonds, a program launched in 2012 to hold down long-term interest rates and provide further fuel to the economy. The Fed expects to end it in October, having pushed its holdings of bonds, loans and other assets to more than $4.4 trillion.

Sen. Mike Johanns (R., Neb.) said he was surprised and pleased the Fed is winding down the bond-buying program. "I think you've moved in the right direction," he said.

However, some Republicans pressed Ms. Yellen on the risk that the central bank's low interest-rate policies are stoking new financial bubbles. Ms. Yellen in her testimony acknowledged that low interest rates are causing some investors to move into riskier assets in search of better returns, which could make the financial system more vulnerable. She pointed to boomlets in areas such as junk-bond and leveraged-loan issuance as potential problems the Fed is watching.

Central Bank Watch

Here is how the central banks in four major advanced economies have moved two key levers of monetary policy in recent years, and how two important economic indicators have responded. View the interactive.

"Rather than have a policy that causes bubbles, why wouldn't we have a policy that doesn't cause that?" asked Sen. Tom Coburn, (R., Okla.).

"The reason we have low interest rates is to deal with a very real problem, namely the economy is operating significantly short of its potential," Ms. Yellen responded. "Employment is suppressed well below its maximum sustainable level and inflation is running below our objectives. That's why we are holding interest rates low."

Investors had a different gripe. A report accompanying Ms. Yellen's testimony noted that valuations in some smaller biotechnology and social-media firms were stretched, as well as small-company stocks in general.

Stocks bounced around after her testimony began, with the Dow Jones Industrial Average ending the day up 5.26 points, or 0.03%, at 17060.68. Biotechnology and social-media stocks were hit harder than others. The Global X Social Media Index ETF, which tracks social-media stocks, fell 1.1% to $18.94. The iShares Nasdaq Biotech ETF dropped 2.2% to $252.43. The Russell 2000 index of small-capitalization stocks fell 1% to 1153.81.

"I don't want investment advice from the chairman of the Federal Reserve," said Robert Pavlik, chief market strategist at Banyan Partners, which manages $4.5 billion in assets. "It's not an area that she should be weighing in on. She should allow the markets to do their thing. I want her to comment on the economy, not the stock market."

—Steven Russolillo contributed to this article.

 

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com

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