Table 15-3

-Refer to Table 15-3.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
A)buy Treasury securities.
B)sell Treasury securities.
C)decrease the required reserve ratio.
D)decrease income taxes.

Question

Table 15-3
 
-Refer to Table 15-3.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
A)buy Treasury securities. 
B)sell Treasury securities. 
C)decrease the required reserve ratio. 
D)decrease income taxes.

Quizplus · Accepted Answer

According to the table, the actual real GDP in 2015 is expected to be above the potential real GDP, which indicates an inflationary gap. To decrease the inflationary gap and bring real GDP back to its potential level, the Federal Reserve should implement contractionary monetary policy by selling Treasury securities, which would decrease the money supply and increase interest rates, thereby reducing aggregate demand and inflationary pressures. Buying Treasury securities or decreasing the required reserve ratio would have the opposite effect of increasing the money supply and stimulating aggregate demand, which would exacerbate the inflationary gap. Decreasing income taxes is a fiscal policy tool and not directly related to the Federal Reserve's monetary policy.

Table 15-3 -Refer to Table 15-3.Consider the Hypothetical Information in the Table