1. If the current rate of unemployment is 3.8%, under which of the following cir
ID: 1162410 • Letter: 1
Question
1. If the current rate of unemployment is 3.8%, under which of the following circumstances would you expect the Fed to raise rates and enact contractionary monetary policy?
if the natural rate of unemployment is below 3.8%.
if the natural rate of unemployment is above 3.8%.
if the inflation rate is below the target 2% rate.
if the real equilibrium interest rate is above the unemployment rate.
2.
The purchase of $49 million of Treasury securities by the Federal Reserve, given no change in the quantity of currency, will cause reserves at banks to increase by
A.if the natural rate of unemployment is below 3.8%.
B.if the natural rate of unemployment is above 3.8%.
C.if the inflation rate is below the target 2% rate.
D.if the real equilibrium interest rate is above the unemployment rate.
Explanation / Answer
1) if the natural rate is above the current level of unemployment FED takes the contractionary monetary policy to move the economy back to long-run equilibrium. As by this policy interest rate will be increased. People tends to save more instead of consumption. So aggregate demand will be decreased, as a result, real GDP will be decreased and the unemployment rate will be increased. Option B is correct.
2) The purchase of $49 million of Treasury securities by the Federal Reserve will increase bank reserve by $49 million as money supply does not change.
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