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 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)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 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)increase the required reserve ratio. 
D)increase income taxes.

Quizplus · Accepted Answer

According to the table, real GDP is below potential GDP in 2017. To increase real GDP to its potential level, the Fed should use expansionary monetary policy. Buying Treasury securities is a tool of expansionary monetary policy that increases the money supply, lowers interest rates, and stimulates borrowing and spending by households and businesses. As a result, aggregate demand increases and real GDP rises. Therefore, choice A is the best answer. Selling Treasury securities, increasing the required reserve ratio, and increasing income taxes are tools of contractionary monetary and fiscal policies that reduce the money supply, raise interest rates, and discourage borrowing and spending. These policies would further depress real GDP below its potential level.

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