Question

Which one of these policies is the Fed most likely to follow if employment is well...

Which one of these policies is the Fed most likely to follow if employment is well above the full level of employment and inflation is moderately high?

Select one:

a. Decrease the Required Reserve Ratio

b. Buy government bonds

c. Target a lower Federal Funds Rate

d. Increase income tax

e. Sell government bonds

2.

Suppose that the Price level = 120, Supply of Money = $20 billion, and Real GDP = $4 billion. What does the velocity of money equal?

Select one:

a. 8

b. 12

c. 15

d. 20

e. 24

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Homework Answers

Answer #1

1. Answer: e. Sell government bonds

If employment is well above the full level of employment, it is called inflationary gap (Excess demand since AD>AS). During this situation there is excess money circulation in the economy. To correct this, the Fed sells government bonds in the open market, By doing this money supply is controlled and full employment equilibrium is reached.

2. Answer: e. 24

(P) Price level = $120

(M) Supply of Money = $20

(Y) Real GDP = $4

(V) Velocity = ?

V = 24

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