Table 15-2

-Refer to Table 15-2.Consider the hypothetical information in the table above for potential real GDP,real GDP,and the price level in 2018 and in 2019 if the Federal Reserve does not use monetary policy.If the Fed wants to keep real GDP at its potential level in 2019,it should
A)buy Treasury securities.
B)sell Treasury securities.
C)increase the required reserve ratio.
D)increase income taxes.

Question

Table 15-2
 
-Refer to Table 15-2.Consider the hypothetical information in the table above for potential real GDP,real GDP,and the price level in 2018 and in 2019 if the Federal Reserve does not use monetary policy.If the Fed wants to keep real GDP at its potential level in 2019,it should
A)buy Treasury securities. 
B)sell Treasury securities. 
C)increase the required reserve ratio. 
D)increase income taxes.

Quizplus · Accepted Answer

If the Federal Reserve wants to keep real GDP at its potential level in 2019, it needs to stimulate the economy by increasing aggregate demand. Buying Treasury securities in the open market would increase the money supply, lower interest rates, and stimulate consumption and investment spending, thus increasing aggregate demand and closing the GDP gap. Selling Treasury securities, increasing the required reserve ratio, or increasing income taxes would have the opposite effect, reducing the money supply, raising interest rates, reducing spending, and further widening the GDP gap. Therefore, option A is the best choice.

Table 15-2 -Refer to Table 15-2.Consider the Hypothetical Information in the Table