Table 26-1

-Refer to Table 26-1. 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 26-1
 
-Refer to Table 26-1. 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 would increase spending and investment, potentially increasing real GDP. Selling Treasury securities or pursuing contractionary policy would reduce spending and investment, potentially decreasing real GDP. Lowering capital gains taxes is a fiscal policy, not a monetary policy, and would not directly affect real GDP in 2015.

Table 26-1 -Refer to Table 26-1. the Hypothetical Information in the Table