1. Governments in market based economies never target 0% unemployment. What migh
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Question
1. Governments in market based economies never target 0% unemployment. What might be one reason they do not?
a) Governments have an interest in keeping some proportion of the population unemployed
b) Policies targeted at 0% unemployment would also likely drive high inflation
c) 0% unemployment would put state and local welfare agencies out of business
d) 0% unemployment would have an adverse impact on consumption
2. Suppose the Federal Reserve Board of Governors (the Fed) thinks that the economy is 'overheating' and inflation is a significant threat. What course of action might they take?
a) Lower the discount rate
b) Raise the Fed Funds rate by selling securities on the open market
c) Decrease the reserve requirement
d) Raise the Fed Funds rate by buying securities on the open market
Explanation / Answer
Answer.)
Q1.) b) Policies targeted at 0% unemployment would also likely drive high inflation
The Phillips curve suggests there is a trade off between inflation and unemployment, at least in the short term.
Q2.) b) Raise the Fed Funds rate by selling securities on the open market
A monetary contraction is required for problems like 'overheating' and inflation.
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