9) Suppose the federal government reduces its spending in order to balance its b

Question

9) Suppose the federal government reduces its spending in order to balance its budget. If the Federal Reserve wants to completely offset the effects of this policy in terms of economic growth, unemployment and inflation, what should the Fed do?

A) purchase bonds or raise the required reserve ratio

B) sell bonds or raise the required reserve ratio

C) purchase bonds or lower the required reserve ratio

D) sell bonds or lower the required reserve ratio

E) None of the above

-Could you explain the answer too please.....

15) Geopolitical uncertainty drives oil prices higher that result in an aggregate supply shock. In response, the Federal Reserve increases its target interest rate. In the short run, relative to the short run equilibrium situation if the Federal Reserve undertakes no action, output (RGDP) _______ and the price level _________.

A) increases; increases

B) increases; decreases

C) decreases; increases

D) decreases; decreases

E) unchanged; decreases   

-I believe that when a supply shock SRAS shift left so it rasie the price level and decrease the output but the answer is D. I do not understand this part of the question.

20) If interest rates and investment rise, which of the following could explain these changes?

A) The government instituted an investment tax credit

B) The government went from surplus to deficit

C) The government reduced the tax rate on savings

D) The Federal Reserve buys bonds

E) None of the above is correct

-I do not understand this question when is the particular situation that both interest rate and investment rise?

Explanation / Answer

9. C) purchase bonds or lower the required reserve ratio

As, reducing spending is contractionary fiscal policy which will decrease output, so to increase output , one can use Monetary expansionary policy like  purchase bonds or lower the required reserve ratio.

15. D) decreases; decreases

-I believe that when a supply shock SRAS shift left so it rasie the price level and decrease the output

Yes, your reasoning is correct , but you are just forgetting one thing here.

You are comparing your new point with the old equilibrium , but here in the case he has asked to compare the point of no fed action , to the point where new equilibrium is reached due to the FED action

So, in New equilibrium as fed increased target rate , at is achieved at ahigher interest rate then the old equilirium.

20.

A) The government instituted an investment tax credit

Since , reduction in Investment tax will compensate for the increase in interest rate , Hence both increases.

If you don't understand anything, then comment, I will revert back on the same.

And If you liked the answer then please do review the same. Thanks :)

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