2. What action can the Federal Reserve take to reduce unemployment? 3. Using one

Question

2. What action can the Federal Reserve take to reduce unemployment?

3. Using one of the tools available to the Federal Reserve, explain how the Fed would accomplish the action you listed in response to No. 2.

4. Assume the economy is currently operating at the natural rate of unemployment, what affects will the action you listed in response to No. 2 have in the short run on output, price level, and interest rates? Please use the AS/AD and Money Market diagrams to illustrate your answer.

5. Again, assume the economy is currently operating at the natural rate of unemployment, what affects will the action you listed in response to No. 2 have in the long run on output, price level, and interest rates? Please use the AS/AD and Money Market diagrams to illustrate your answer.

** ALL PART OF SAME QUESTION **

Explanation / Answer

2. The Federal Reserve can take an expansionary monetary policy to reduce unemployment.The Fed can take expansionary monetary policy by decreasing the bank's reserve requirement, or by reducing interest rates or by buying treasury securities. All these actions increase the money supply. An expansionary monetary policy increases the money supply and increases borrowing and investment. Increase investment results in firms hiring more people and reducing the unemployment rate.

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