What actions could the Federal Reserve take to achieve consistent growth in real

ID: 1118643 • Letter: W

Question

What actions could the Federal Reserve take to achieve consistent growth in real GDP at 4 percent per year?

A. The Fed could increase in the growth rate of the money supply by 1% each year until the inflation rate was exactly equal to 4 percent.

B. The Fed could follow contractionary monetary policy that would reduce the federal funds rate to zero so investment will rise consistently.

C. The Fed has no direct control over real GDP in the long run, so there are no actions it could take to achieve that goal.

D. The Fed could maintain a growth rate of the money supply of 4 percent, regardless of whether inflation was rising or falling in the economy.

C. The Fed has no direct control over real GDP in the long run, so there are no actions it could take to achieve that goal.

Reason

In the long run, the real output can not be manipulated by the quantity of money. Thus, it can not have such a target level of real GDP output.

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