1. Suppose that a drought decreases potential GDP in Artica to $250 billion. Explain what happens if the central bank lowers the federal funds rate. Do you recommend that the central bank lower the...

1. Suppose that a drought decreases potential GDP in Artica to $250 billion. Explain what happens if the central bank lowers the federal funds rate. Do you recommend that the central bank lower the interest rate? Why? 2.  “When you encourage consumption by inhibiting your interest rates from rising to their equilibrium level, you will in fact buy problems, and we have

in fact bought problems,” Kansas City Fed President Thomas Hoenig said in his final speech in office. The Fed has cut rates to near zero and bought more than $2 trillion in bonds to boost the economy. Source: Reuters, September 28, 2011

What are some of the problems that near zero interest rates and $2 trillion of quantitative easing have created?