Question

If unemployment is 4% and inflation is 4%, which of the following is a keynesian economistely to advocate? Select one a. Increase government spending b. Increase income tax c. Target a lower Federal Funds Rate d. Sell bonds through an Open Market Operation e. Do nothing Assuming that banks lend all of their access reserves and people deposit all of their money, what will the Fed have to do in order to decrease the supply of money by $40 billion if the Required Reserves Ratio is 207 Select one: It needs to buy $8 billion dollar worth of bonds through an Open Market Operation b. It needs to buy $10 billion dollar worth of bonds through an Open Market Operation It needs to sell $8 billion dollar worth of bonds through an Open Market Operation d. It needs to sel $10 billion dollar worth of bonds through an Open Market Operation The Fed cannot influence the supply of money

Answer 1

1.

B

In the given scenario, inflation rate is on a higher side that is 4%. To reduce the inflation rate, the government has to increase the income tax so that consumption is discouraged and inflation decreases.

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2.

C

Working note:

To decrease the money supply, contractionary monetary policy will be applied, that will take place by selling the bonds in open market operations.

Multiplier = 1/.20 = 5

Amount of bonds to be sold in the market = Total decrease in money supply / multiplier = 40/5

Amount of bonds to be sold in the market = $8 Billion