I need the answer perfectly. Please Essay Question (10 points on exam 4 Answer t
ID: 1120927 • Letter: I
Question
I need the answer perfectly. Please Essay Question (10 points on exam 4 Answer the following question in an essay of one or two well-written paragraphs using complete sentences. To get credit you must turn in a typed copy during your final exam time period AND submit a copy on Western Online in the Final Exam essay drop box before your scheduled class period. Reminder...This is NOT a group project! "Consider the following hypothetical scenario" actual GDP is measured to be 3% below potential. Measured unemployment, by most accounts, is thought to be 2% above the natural rate of unemployment. Given that current inflation is relatively low: 1. What will the Federal Reserve most likely do at the next few Federal Open Market Committee (FOMC) meetings? ming the Fed follows the policy course you set forth in part (1), what should the Fed be concerned with in the years that follow? Given your answers in parts (1) and (2), what do you think the Fed will have to do in terms of interest rate policy in the next few years? 3.Explanation / Answer
Given that the actual GDP is below the potential, there is more unemployment and low inflation, FOMC should reduce the money supply. Reducing the money supply increases the inflation, which reduces the real price of goods and hence increases the demand for goods in the economy. To match the increased demand for goods, there is higher production and hence higher workforce is employed as a result, the actual GDP will go up and unemployment will go down to hit the equilibrium. It should be cautious that the supply of money is reduced such that the inflation rate does not go up the equilibrium, and the economy does not move towards hyperinflation. It has to increase the interest rates, which will increase the opportunity cost of holding money, as a result there will a lower demand of money and a higher money supply.