If there is a large increase in the price of oil and the Fed wishes to maintain stable output,which of the following should it do?
A) Do nothing,because the self-correcting mechanism will adjust the economy
B) Sell bonds in the open market
C) Wait,because output seldom changes when there is an increase in the price of oil
D) Encourage firms to not adjust the wages they pay
E) Buy bonds in the open market.

Question

Quizplus · Accepted Answer

When there is an increase in the price of oil, it can cause inflationary pressures in the economy. By buying bonds in the open market, the Fed can increase the money supply in the economy, which can help alleviate these pressures and keep output stable. This is because an increase in the money supply can lead to lower interest rates, which can encourage borrowing and investment by firms, leading to increased output.

If There Is a Large Increase in the Price of Oil