1. Discuss the conditions under which you might expect the Fed to cut interest rates.

The scenario established in the article suggests a possibility of a recession. If the chairman Bernanke and the Fed become convinced that a recession is likely they would use monetary policy to stimulate the economy. If you wish to extend the question you could ask how each of the Fed's monetary policy tools could be used to achieve the goal of lower interest rates.

2. Describe and economy that is both too hot and too cold at the same time.

There is always much emphasis on the Fed and its worry about inflation. This article is pointing out however, that the Fed also has to worry about recession. In fact it is this balancing act that is highlighted by the article. The too hot side of the economy is the side characterized by job growth, increasing wages and income for workers, and strong consumer and investment spending. These things all add up to a strong (could be too hot) economy. On the other side is the troubling housing market which continues to slide. As housing prices fall, homeowners are not able to borrow on their equity to spend on other goods and services. In fact, mortgage equity withdrawals fell to about $380 billion, the lowest in almost three years. The whole scenario leaves Bernanke and the Fed walking a tightrope as 2007 approaches.

Multiple Choice/True False Questions