When current output is greater than potential output, which of the following mon

Question

When current output is greater than potential output, which of the following monetary policies is the Federal Reserve (the Fed) likely to enact? Decreasing reserves to increase interest rates. Making imports more costly to increase domestic spending, Stimulating consumer spending by manipulating tax rates, Increasing reserves to decrease interest rates. Which of the following is the most direct result of the correct monetary policy above? Decreases in investment and a slowing of output growth. Increases in investment, aggregate demand, and long run growth. Decreases in sales of domestically-made goods. Increases in sales of domestically-made goods.

Explanation / Answer

(1) When current output is greater than potential output, Feds monetary policy will be

- Decreasing reserves to increase interest rates

(When actual output > potential output, there is an inflationary gap to close which Fed has to lower aggregate demand by raising interest rates, which will reduce consumption and investment)

(2) Direct result of money policy above is

- Decreases in investment and a slowing of output growth

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