(B) Choose the correct answer from the brackets below: Contnuing with the previo
ID: 1202948 • Letter: #
Question
(B) Choose the correct answer from the brackets below:
Contnuing with the previous problem, if Y1 = Potential GDP, how could the Fed restore output to its potential level following the increase in oil prices? The Fed should attempt to (increase/decrease/Demand/Supply) the interest rate in order to ( increase/decrease/Demand/Supply) Aggregate increasedecreaseDemandSupply.
In order to accomplish the desired change in the interest rate, the Fed should (increase/decrease/Demand/Supply) the money supply.
Explanation / Answer
The economy is suffering from Supply lag, if Demand reamins same, Demand will be more than Supply leading to inflation. To deal with this probelm Fed should increase interest rates in order to discourage borrowings and decrease money supply in the economy. This will decrease imoney in the hands of the public and they will demand less now.
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