Question

1. Answer the following questions related to stabilization.

1.1) Imagine the United States educational system improves, which makes workers more productive. If the federal reserve is trying to stabilize the price level in response, they should:

a. do nothing, because prices cannot be prevented from changing in the long run.

b. increase the discount rate.

c. Raise taxes

d. sell bonds in open market operations.

e. lower the reserve requirement.

f. Increase government spending.

g. do nothing, because prices will not change anyhow.

1.2) Imagine that the federal reserve has decided to increase the reserve requirement. Congress worries about the short run effect that this might have on GDP, so to offset this action, they could:

a. decrease government spending.

b. do nothing, because output will not change anyhow.

c. decrease taxes.

d. increase the discount rate.

e. buy government bonds in open market operations.

f. do nothing, because they cannot prevent changes in output anyhow.

Answer 1

a) An increased productivity will increase the supply and shift the supply curve to the right, decreasing the price and increasing the output, the Fed need to "B" increase the discount rate, that will increase the price in the market.

b) "C"

they can decrease the taxes in the market and that will offset the decrease in the money supply due to Fed policy.