Question 8-Refer to the figure below to answer the following question AS SAS 130

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Question 8-Refer to the figure below to answer the following question AS SAS 130 SAS 110 100 90 AD1 ADo 4 15 6 17 18 19 Real GDP (trillions of 2009 dol In the graph, LAS stands for long-run aggregate supply, SAS stands for short-run aggregate supply, while AD stands for aggregate demand. Suppose that the economy is at point B. Which of the following policy options for the Fed will move the economy towards potential GDP? o o o o buy government bonds to lower the federal funds rate decrease the government's budget deficit sell government bonds to raise the federal funds rate decrease taxes Question 9 You are being interviewed for a position at the Federal Reserve and the hiring committee asks you to talk about the policy tools at the Fed's disposal to increase the stock of money in the economy. Which of the following would be an appropriate answer o You would discuss how the Fed can increase the stock of money by lowering its o You would discuss how the Fed can increase the stock of money in the economy by o You would discuss how the Fed can increase the stock of money by selling short-term o You would discuss how the Fed can increase the stock of money by forcing commercial discount rate increasing the required reserve ratio government bonds banks to lower their federal funds rate

Explanation / Answer

8. sell government bonds to raise the federal funds rate.

Economy will reach at potential gdp when SAS curve shifts leftwards from SAS0 to SAS1. When the Fed sell government bonds then it takes out money from the system and shifts short run supply curve leftwards.

9. You would discuss how the Fed can increase the stock of money by lowering its discount rate.

Lowering discount rate, reserve requirement ratio, federal funds rate and buying of government bonds leads to increase in the stock of money in the economy and all these are determined by the Federal Reserve.

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