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# Federal Funds rate and the Discount rate

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Following is a problem that I have to solve:

GDP growth is approximately 1.5% and has been at that level for two years.
Inflation, as measured by both the CPI and GDP deflator has been at approximately 1-2% for the last two years.
Unemployment has recently moved to 7.3%, up from 7% one year ago, and 6.5% two years ago.
The Federal Funds rate is 3.5%, and the Discount rate is 3.25%.
The Government budget has been operating at a deficit of approximately \$60 billion for the last year, up from \$50 billion the previous year.

https://brainmass.com/economics/economic-growth/federal-funds-rate-and-the-discount-rate-46019

#### Solution Preview

I'm not sure what the specific question is but let me attempt to explain the scenario you are faced with. Let's think about this in terms of monetary policy and fiscal policy.

First you say,

"GDP growth is approximately 1.5% and has been at that level for two years."

I am assuming this is nominal not real values. This is below normal GDP growth of around 3% per year in the U.S. If the 1.5% is nominal and we take into consideration the second piece of data...

"Inflation, as measured by both the CPI and GDP deflator has been at approximately 1-2% for the last two years"

then we know real gdp growth is close to 0% and maybe negative. In real terms this looks like we are in a recession or one is around the corner. Let's look at some of your other stats.

You say,

"Unemployment has recently moved to 7.3%, up from 7% one year ago, and 6.5% two years ago."

This suggests that the economy is slowing down too. So, given our moderate rate of inflation gdp has been falling and unemloyment has been increasing over the last two years. This ...

#### Solution Summary

Federal Funds rate and the Discount rate

\$2.19