Board of Governors of the Federal Reserve System

1. How did the Fed cooperate with the U.S. Treasury during and immediately after World War II?
2. What were the economic consequences of keeping interest rates low?

Lecture 2, Video Clip 13: The Fed-Treasury Accord and central bank independence
Questions for Classroom Discussion:

1. Describe the Fed-Treasury Accord and evaluate whether it was effective in improving economic conditions. Discuss the implications of the agreement.
2. Identify the various ways in which the Federal Reserve is insulated from political influence.
3. Compare the costs and benefits to society of central bank independence.

Lecture 2, Video Clip 14: Monetary policy in the '50s and early '60s
Questions for Classroom Discussion:

1. What was a "lean against the wind" policy? Was it effective in the 1950s and early 1960s?
2. Describe monetary policy in the mid-1960s and into the 1970s? What was the rationale of the policy?
3. Was the trade-off between inflation and unemployment relevant to the choice of policy? Why or why not?

Lecture 2, Video Clip 15: Mid-'60s and '70s monetary policy
Questions for Classroom Discussion:

1. Evaluate the appropriateness of policy in the mid-1960s and into the 1970s and explain how policy impacted economic conditions.
2. Describe exacerbating factors other than monetary policy that may have contributed to the high rates of inflation and numerous recessions from the mid-1960s through the 1970s.

Lecture 2, Video Clip 16: Central bankers have imperfect knowledge
Questions for Classroom Discussion:

1. Why was the idea of a permanent tradeoff between unemployment and inflation so important in contributing to inflationary conditions? How did that lead to a concept of "fine-tuning"?
2. Why were the estimates of full-employment levels of unemployment so important?
3. Explain the roles and importance of data collection and forecasting in monetary policy. Why is accuracy in forecasting so important?

Lecture 2, Video Clip 17: Volcker disinflation
Questions for Classroom Discussion:

1. What does "disinflation" mean? Is it desirable? Why or why not?
2. What was the role of monetary policy in contributing to disinflation in the late 1970s and early 1980s?
3. Describe the conditions leading up to the 1981-82 recession.
4. Summarize monetary policy before and during the recession. What were Chairman Volker's goals?
5. Why was there significant political pressure against the policy?
6. How did this experience affect monetary policy after the recession and even today? Will the U.S. ever have a similar phenomenon to the Great Inflation? Why or why not?

Lecture 2, Video Clip 18: The Great Moderation
Questions for Classroom Discussion:

1. Define the term "Great Moderation." Give examples of its characteristics?
2. What happened to the rate of growth of real GDP? What happened to inflation rates?
3. What happened to the length and frequency of recessionary periods?

Lecture 2, Video Clip 19: Causes of the Great Moderation
Questions for Classroom Discussion:

1. What was the role of monetary policy during the Great Moderation?
2. How could changes in business practices, such as improved inventory management, make a difference in recessionary pressures and inflation?
3. Were there financial crises during the Great Moderation? What were the effects?
4. What can we learn from the Great Moderation? How does that period affect monetary and fiscal policy today?
5. Compare monetary policy since the Volcker era to monetary policy in the 1960s and 1970s. What are the key differences? Which was the more effective, and why?
6. Explain why financial crises became less of a concern during the Great Moderation? Did they disappear?

Lecture 2, Video Clip 20: The housing bubble
Questions for Classroom Discussion:

1. How large was the increase in housing prices?
2. Describe what caused the rapid rise in housing prices.
3. What is a bubble? Why are rising asset prices not necessarily a positive event for everyone?
4. What are several possible causes of the bubble?

Lecture 2, Video Clip 21: Deterioration in lending standards
Questions for Classroom Discussion:

1. Describe the characteristics of the decline in lending standards.
2. Explain why lending standards seemed to deteriorate. Give examples of changing incentives.
3. How could deterioration in lending standards be caused by a bubble and at the same time contribute to the housing bubble?

Lecture 2, Video Clip 22: Bursting of the bubble: Declining demand, falling prices
Questions for Classroom Discussion:

1. List several causes of the bursting of the housing bubble. Explain how each could contribute to the decline in housing prices.
2. What were the effects of the bursting housing-price bubble on the rest of the economy?

Lecture 2, Video Clip 23: Financial crisis triggers vs. vulnerabilities
Questions for Classroom Discussion:

1. Define a financial crisis trigger and give examples.
2. Define a financial crisis vulnerability and give examples.
3. How did the triggers and vulnerabilities lead to serious declines in economic conditions? Why was the collapse in housing prices so much more serious than the collapse of dot-com stock prices in 2001? How did the Great Moderation affect the vulnerability of the economy to a serious financial trigger?

Lecture 2, Video Clip 24: Private-sector vulnerabilities
Questions for Classroom Discussion:

1. What were the private-sector vulnerabilities that amplified the effects of the triggers?
2. Explain how increased leverage, financial institutions' failure to monitor their own risk adequately, increased short-term funding, and new exotic financial instruments amplified the effects of the triggers.

Lecture 2, Video Clip 25: Public-sector vulnerabilities
Questions for Classroom Discussion:

1. What were the public-sector vulnerabilities that amplified the effects of the triggers?
2. What were the gaps in the regulatory structure? How did those gaps lead to a worsening of the financial crisis?
3. What additional failures by regulatory agencies took place during the financial crisis? Explain how each contributed to a worsening of the crisis.
4. What are systemic problems?
5. How did systemic problems differ from problems with individual banks or small groups of banks? Why did they receive insufficient attention?

Lecture 2, Video Clip 26: Role of monetary policy in contributing to the crisis
Questions for Classroom Discussion:

1. Summarize the evidence about the role of monetary policy in contributing to the crisis.
2. Is that evidence convincing one way or another?

Lecture 2, Video Clip 27: Economic consequences of the crisis
Questions for Classroom Discussion:

1. Summarize the effects of the financial crisis on financial markets.
2. How did the collapse of the housing bubble affect housing construction? Explain why.
3. Describe how and why unemployment changed during the bubble and the subsequent financial crisis.