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In 2015, the United States is still recovering from the recession. The following measures are implemented: The Fed sells securities. Illustrate the effects of this change on the economy and indicate the change in real GDP, the price level, and unemployment rate.

Effect on:

Real GDP __________ Price __________ Unemployment __________

Answer 1

When Fed sells securities such as bonds, it means that they aims to reduce the economy's money supply. This happens when the bonds issued by Fed has been bought by somebody in exchange of money. This will swipe up the excess money from the society.

This is part of the open market operation technique of Fed. This security selling increases the rate of interests by reducing the money supply. The prices will be pushed down.

As this is a contractionary monetary policy, it increases the reserve ratio as well as discount rate. This policy is introduced whenever there is a situation of inflation in the economy.

As interest rates are being decreased at this policy, the consumption level will reduce and investment will also decreases. This leads to a decrease in the aggregate demand. This real GDP will also fall.

As the money supply reduces, several employees had been rejected from employment. They lose their job and new people cannot enter into employment. Thus, unemployment increases.