Table 17-3
$$\begin{array} { | c | c | c | c | }
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2014 & \$ 14.0 \text { trillion } & \$ 14.0 \text { trillion } & 150 \
\hline 2015 & 14.5 \text { trillion } & 14.8 \text { trillion } & 154 \
\hline
\end{array}$$
-Refer to Table 17-3.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 17-3
 $$\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2014 & \$ 14.0 \text { trillion } & \$ 14.0 \text { trillion } & 150 \
\hline 2015 & 14.5 \text { trillion } & 14.8 \text { trillion } & 154 \
\hline
\end{array}$$
-Refer to Table 17-3.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

Since real GDP has already exceeded its potential level, the economy is experiencing an inflationary gap (discussed in Chapter 17). To bring the real GDP back to its potential level, the Fed needs to decrease aggregate demand (AD). Selling Treasury securities decreases the reserves in the banking system, leading to a contraction of money supply, which reduces AD. Therefore, option B is the correct answer. Options A, C, and D all increase AD, which would lead to a further expansion of real GDP and worsening of the inflationary gap.

Table 17-3 -Refer to Table 17-3