Answer the following question in an essay of one or two well-written paragraphs
ID: 1121974 • Letter: A
Question
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..his 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 2. Ass 3. meetings? with in the years that follow? rate policy in the next few years? will the Federal Reserve most likely do at the next few Federal Open Market Committee (FOMC) uming the Fed follows the policy course you set forth in part (1), what should the Fed be concerned Given your answers in parts (1) and (2), what do you think the Fed will have to do in terms of interestExplanation / Answer
1.
Actual GDP = 3% below the level of potential GDP
Unemployment level = 2%more than the natural rate of unemployment
Inflation rate = low
Above conditions reflect that economy is going through the slowdown or a recessionary period. Due to this reason, the FOMC will take the decision to use the tool of open market operation to buy the government securities. It will inject the money into the economy and consumer and investment spending will be encouraged. It will be complemented by the reduction in the Federal Funds Rate so that household come ahead for consumption and firms come ahead for investment spending. It will first boost the aggregate demand. Then, it will increase the aggregate supply to cater the demand. Hence the economy will move towards the potential GDP.
Further, the increase in supply, requires more workers. Hence, new employment opportunity will be created. So, unemployment level will be pushed towards the natural level of unemployment. As a result, the economy will recover from slowdown and move towards the growth.
2.
Fed will be worried that the increase in demand of workers as an input factor of the production, will set the demand pull inflation as well as more money in the economy will also push the prices to the higher level, it will set inflationary pressure in the economy and overheating can take place. So, the Fed is worried.
3.
In the coming years, the Fed will set the inflation rate target in the economy. In a scenario of higher inflation rate, Fed will gradually increase the interest rate. It will start with increase in the federal funds rate. With an increase in the interest rates, people and firms will be discouraged to take loans and advances. Hence, aggregate demand will come down. It will help in controlling the inflation.