Macroeconomics Federal policies

Question

Which one of these policies is the Fed most likely to follow if employment is well above the full level of employment and inflation is moderately high?

Select one:

a. Decrease the Required Reserve Ratio

b. Buy government bonds

c. Target a lower Federal Funds Rate

d. Increase income tax

e. Sell government bonds

Answer 1

Decreasing the reserve ratio means banks can make more loans. If they do so the money supply would increase....Expanionary

Buying Government bonds Pushes up bond prices, Increases deposits (and reserves) and lowers interest rates.... Expansionary.

Targeting a lower Fed funds rate would encourage banks to loan more. lowering rates...Expansionary

Incrasing taxes is contractionary However, the Fed has nothing to do with taxation or any other type of fiscal policy.

This leaves selling bonds. This depresses bond prices pushing up yields. This will reduce investment and other types of interest sensitive spending