Question

For each of the following what kind of monetary policy do you suggest?

a. Government decides to take policy to reduce deficit.

b. Construction workers goes on a strike for 2 months.

c. US dollar depreciates with respect to euro

d. People become more optimistic about the economy

e. Productivity of U. S workers increase due to technological advancement

Answer 1

Ans.

A) To reduce deficit government will increase taxes. Higher tax increase revenue and help to reduce deficit.

B) construction workers go on a strike federal government can increase the minimum wages. Which is known as wage push inflation.

C) When US dollar depreciates with respect to euro. It lead to increase in inflation in US. Fed will use restrictive monetary policy to reduce inflation rate. By reducing money supply Fed raises interest rates. Which will attract foreign savings.

D) When people are optimistic about economy that means there is high level of consumer confidence which encourages higher marginal propensity to consume. It tends to increase spending. Federal government will decrease interest rates as this will give consumers more disposable income to spend.