Table 26-3

-Refer to Table 26-3. 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 26-3
 
-Refer to Table 26-3. 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

If the Fed wants to keep real GDP at its potential level in 2015, it should sell Treasury securities. The table shows that real GDP is above its potential level in 2015, indicating that the economy is operating above its capacity. Selling Treasury securities would decrease the supply of money, causing interest rates to increase and reducing spending and inflationary pressure. This would help bring real GDP back to its potential level. Buying Treasury securities (choice A) would increase the money supply, causing interest rates to decrease and potentially increasing inflationary pressure. Decreasing the required reserve ratio (choice C) would increase the money supply, also potentially increasing inflationary pressure. Decreasing income taxes (choice D) would increase disposable income and potentially increase spending, exacerbating the inflationary pressure.

Table 26-3 -Refer to Table 26-3. Consider the Hypothetical Information in the Hypothetical