"When the Fed is concerned with an inflationary gap it buys government securities." Is the previous statement correct or incorrect? Explain your answer
What will be an ideal response?
The statement is incorrect. An inflationary gap occurs when real GDP exceeds potential GDP. In this case, the Fed wants to decrease aggregate demand and thereby decrease real GDP. In order to decrease aggregate demand, the Fed needs to raise the federal funds rate. But when the Fed buys government securities, it lowers the federal funds rate. Therefore the proper Fed policy when it is concerned about an inflationary gap is to sell government securities and thereby raise the federal funds rate.
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What are two main obstacles to increased international integration?
What will be an ideal response?
What are the advantages of a flat tax system?
Use the graph below to show the effect of a discretionary increase in government spending. Assume the economy is currently in an expansionary period. Discuss how this effects the federal budget.
