Assume the Fed's target for unemployment is 4% to 5%, and its target for inflation is 2% to 3%. If the unemployment rate is 10% and the inflation rate is 2%, the Federal Reserve will most likely
A) raise the discount rate.
B) buy bonds.
C) lower the reserve requirement.
D) sell bonds.

Question

Quizplus · Accepted Answer

When the unemployment rate is significantly higher than the Fed's target (10% vs. 4%-5%), and inflation is within the target range (2%), the Federal Reserve is likely to take expansionary monetary policy actions to stimulate economic growth and reduce unemployment. Buying bonds is an expansionary action that increases the money supply, lowers interest rates, and encourages spending and investment.

Assume the Fed's Target for Unemployment Is 4% to 5