Answer the following question in an essay of one or two well-written paragraphs
ID: 1125459 • 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... 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. 2. 3. What will the Federal Reserve most likely do at the next few Federal Open Market Committee (FOMC) meetings? Assuming 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?Explanation / Answer
1. When actual GDP is below potential GDP federal open market committee is most likely to undertake open market purchase. Fed will decide to buy bonds in exchange for money. This increases the money supply and brings the economy closer to potential gdp.
2. Increase in money supply leads to increase in inflation.
Inflation is directly proportional to money supply. Higher the money supply higher is the inflation. Fed should be concerned about inflation in the years that follow.
3. To curb inflation Fed will have to increase interest rate in the next few years. When the Rate at which banks lend money increases, it reduces the money available in the market. This results in decreasing inflation rate.