Question

Suppose that you are a member of the Board of Governors of the Federal Reserve System and the economy is experiencing an 8 percent inflation rate. Unemployment is at the full-employment level and the target interest rate is currently 4 percent.

a. If the economy is experiencing a sharp rise in inflation, as a member of the Board of Governors, you would recommend

• decreasing the federal funds rate.

• setting the federal funds rate equal to the discount rate.

• setting the federal funds rate equal to zero.

• increasing the federal funds rate.

b. To lower the inflation rate to 4 percent, you recommend contracting the supply

• increasing the reserve ratio, the IOER rate, or the discount rate, or selling bonds.

• decreasing the reserve ratio, increasing the IOER rate or the discount rate, or buying bonds.

• increasing the reserve ratio, decreasing the IOER rate or the discount rate, or selling bonds.

• decreasing the reserve ratio, the IOER rate, or the discount rate, or buying bonds.

c. The recommendations you provided above would

• reduce the lending ability of the banking system, decrease the real interest rate, and increase investment spending, aggregate demand, and inflation.

• increase the lending ability of the banking system, decrease the real interest rate, and increase investment spending, aggregate demand, and inflation.

• reduce the lending ability of the banking system, increase the real interest rate, and reduce investment spending, aggregate demand, and inflation.

• increase the lending ability of the banking system, decrease the real interest rate, and reduce investment spending, aggregate demand, and inflation.

Answer 1