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1. Suppose businesses anticipate that the CPI will rise, and write contracts to increase their pr...

1. Suppose businesses anticipate that the CPI will rise, and write contracts to increase their prices. The federal reserve worries about the effect this will have. If they their goal is to stabilize GDP, they should ____________. If their goal is to stabilize CPI, they should ____________.

a. sell bonds; sell bonds.

b. buy bonds; buy bonds.

c. sell bonds; buy bonds.

d. buy bonds; sell bonds.

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Rise in price level is not good for stability of economy. Rise in price level affects both GDP and CPI unfavorably. If Fed wants to control price level, it would be liable to sell bonds in open market thereby moping up excess supply from market and keeping tab on inflationary pressures.

Answer: ( a)

If government buys bond from open market, then both price and GDP would be negative affected.

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