Table 26-2

-Refer to Table 26-2.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2014 and in 2015 if the Federal Reserve does not use monetary policy.If the Fed wants to keep real GDP at its potential level in 2015,it should

Question

Table 26-2
 
-Refer to Table 26-2.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2014 and in 2015 if the Federal Reserve does not use monetary policy.If the Fed wants to keep real GDP at its potential level in 2015,it should

Quizplus · Accepted Answer

In 2015, real GDP is below its potential level, indicating an economic downturn. To combat this, the Fed should sell Treasury securities, which will increase interest rates and reduce the money supply. This should discourage borrowing and spending, which will help to bring real GDP closer to its potential level. Buying Treasury securities or decreasing the required reserve ratio would have the opposite effect, increasing the money supply and potentially leading to inflation. Decreasing income taxes would also likely encourage more spending, but it would not directly address the issue of bringing real GDP closer to its potential level.

Table 26-2 -Refer to Table 26-2.Consider the Hypothetical Information in the Table