If the Fed were to focus only on inflation: the private sector would become less

Question

If the Fed were to focus only on inflation: the private sector would become less responsive to the Fed's policies. its capacity to fight recessions would be diminished its independence from political pressures would decrease ts credibility would be reduced. QUESTION 2 e 10 100 200 Money (S million) Figure 14.6 Refer to Figure 14.6. If the money supply increases from M o to Mi money demand must decrease for the money market to return to equilibrium the interest rate will decrease to 6% the interest rate will increase to 10% the money market will return to equilibrium only if the money supply is reduced to its original level

Explanation / Answer

1) Solution: its capacity to fight recessions would be diminished

Explanation: If the Fed were to focus only on inflation it could result in much higher interest rates, which hampers the economic growth

2) Solution: the interest rate will decrease to 6%

Explanation: Since demand intersects M1 at 6% thus interest rate will fall to 6%

3) Solution: get the economy out of recession.

Explanation: Critics of a balances-budget amendment believe that a balanced budget does not give flexibility to government to get the economy out of recession.

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4) Solution: the inflation rate is increasing

Explanation: when the actual unemployment rate is below than the natural rate, inflation increases

Answering first 4 parts

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