Table 15-1

-Refer to Table 15-1.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?
A)The trading desk should sell Treasury securities.
B)The Fed should lower the target for the federal funds rate.
C)The Fed should pursue contractionary policy.
D)The Fed should lower capital gains taxes.

Question

Table 15-1
 
-Refer to Table 15-1.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?
A)The trading desk should sell Treasury securities. 
B)The Fed should lower the target for the federal funds rate. 
C)The Fed should pursue contractionary policy. 
D)The Fed should lower capital gains taxes.

Quizplus · Accepted Answer

Lowering the target for the federal funds rate is expansionary monetary policy which will increase spending and investment, ultimately increasing real GDP to its potential level. Selling Treasury securities (choice A) is contractionary policy and pursuing contractionary policy (choice C) will decrease spending and investment, resulting in a decrease in real GDP. Capital gains taxes (choice D) is a fiscal policy, not a monetary policy, and lowering them would also be expansionary but not directly related to keeping real GDP at its potential level in 2015.

Table 15-1 -Refer to Table 15-1.The Hypothetical Information in the Table Shows