Suppose the economy is growing at a rate higher than the Solow growth rate. To bring the real growth rate back to the Solow growth rate, the Fed should
A) lower the required reserve ratio.
B) buy government bonds in the open market.
C) raise the discount rate.
D) Each of these answers is correct.

Question

Quizplus · Accepted Answer

To bring the real growth rate back to the Solow growth rate, the Fed should raise the discount rate, which would increase the cost of borrowing and reduce investment. This would lead to lower economic growth and bring the economy back to the Solow growth rate, which is the long-run equilibrium growth rate of an economy. Options A and B are not relevant in this case as they relate to the Fed's control over the money supply, while the question is concerned with the long-term growth rate of the economy.

Suppose the Economy Is Growing at a Rate Higher Than