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 2016 and in 2017 if the Federal Reserve does not use monetary policy.If the Fed wants to keep real GDP at its potential level in 2017,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 2016 and in 2017 if the Federal Reserve does not use monetary policy.If the Fed wants to keep real GDP at its potential level in 2017,it should
A)buy Treasury securities. 
B)sell Treasury securities. 
C)decrease the required reserve ratio. 
D)decrease income taxes.

Quizplus · Accepted Answer

If real GDP is currently above its potential level, then the economy is experiencing an inflationary gap. To bring real GDP back to its potential level, the Fed should use contractionary monetary policy, which involves selling Treasury securities. This will decrease the money supply, increase interest rates, decrease investment and consumption spending, and ultimately decrease aggregate demand and bring real GDP back to its potential level. Option A is incorrect because buying Treasury securities would increase the money supply, stimulate investment and consumption spending, and exacerbate the inflationary gap. Option C is incorrect because decreasing the required reserve ratio would also increase the money supply, stimulate investment and consumption spending, and exacerbate the inflationary gap. Option D is incorrect because decreasing income taxes would stimulate consumption spending, increase aggregate demand, and exacerbate the inflationary gap.

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