Table 17-1
$$\begin{array} { | c | c | c | c | }
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2014 & \$ 14.2 \text { trillion } & \$ 14.2 \text { trillion } & 145 \
\hline 2015 & 14.6 \text { trillion } & 14.5 \text { trillion } & 147 \
\hline
\end{array}$$
-Refer to Table 17-1.The hypothetical information in the table shows what the values for real GDP and the price level will be in 2015 if the Fed does not use monetary policy.Which of the following policies makes sense if the Fed wants to keep real GDP at its potential level in 2015?

Question

Table 17-1
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2014 & \$ 14.2 \text { trillion } & \$ 14.2 \text { trillion } & 145 \
\hline 2015 & 14.6 \text { trillion } & 14.5 \text { trillion } & 147 \
\hline
\end{array}$$
-Refer to Table 17-1.The hypothetical information in the table shows what the values for real GDP and the price level will be in 2015 if the Fed does not use monetary policy.Which of the following policies makes sense if the Fed wants to keep real GDP at its potential level in 2015?

Quizplus · Accepted Answer

To keep real GDP at its potential level, the Fed needs to pursue an expansionary policy. Lowering the target for the federal funds rate will decrease interest rates and stimulate borrowing and investment, which will boost aggregate demand and help achieve potential output. Selling Treasury securities and pursuing contractionary policy, on the other hand, will decrease the money supply and dampen economic activity, potentially causing real GDP to fall below its potential level. Lowering capital gains taxes could stimulate investment, but it would not address the problem of low aggregate demand and weak economic growth.

Table 17-1 -Refer to Table 17-1