After you have studied Economics in the News on pp. 816–817, answer the following questions.

a. What was the state of the U.S. economy in the summer of 2021 when the Fed made the decision to keep the federal funds rate at near zero and to keep buying bonds?

b. What was the FOMC majority expectation about future employment, real GDP, and inflation in July 2021?

c. How would an earlier and faster rise in interest rates influence aggregate demand, the output gap, and inflation?

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In mid-2021, the recovery from the Covid recession was still incomplete and the level of employment was below the Fed's mandated maximum employment level. The median estimate of the FOMC members is that maxi- mum employment is attained when the unemployment rate has fallen to 4.4 percent. Figure 1 shows the course of the employment gap-the shortfall of employment from maximum employment. You can see that in June 2021 the employment gap was 1 percent. Everyone agreed that in 2021, the economy had not returned to full employment. But there were signs that Employment gap (percentage of maximum employment) 2 -8. Employment gap of 1 percent Shortfall from maximum employment -10 -12 12/19 04/20 08/20 12/20 04/20 Month/year Figure 1 The Maximum-Employment Shortfall 08/21