If there is an inflationary gap, what is the proper monetary policy to restore price stability? What actions can the Fed undertake to restore price stability?
What will be an ideal response?
An inflationary gap occurs when real GDP exceeds potential GDP. With no action by the Fed, the inflationary gap will be closed by inflation occurring as the money wage rate rises and aggregate supply decreases. In order to avoid the inflation, the Fed needs to decrease aggregate demand and thereby decrease real GDP back to potential GDP. To decrease aggregate demand, the Fed must raise the federal funds rate. To do so, the Fed can sell government securities in an open market operation.
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a. $3 b. less than $3 c. greater than or equal to $3 d. greater than or equal to $4 e. less than $4
If the investment demand curve is vertical, a decrease in the interest rate will __________ investment, and therefore aggregate demand will __________
A) increase; increase B) decrease; increase C) decrease; decrease D) decrease; remain unchanged E) not affect; remain unchanged
If movement of labor across countries is costless and painless, it can be expected that
A. all the countries in the world will operate at the full-employment level. B. the rate of unemployment will fall to zero in all the countries. C. the gross domestic product of the countries will equalize over time. D. the wage rates in the countries will equalize over time.
Antitrust laws are essentially:
A. Anti-monopoly B. Anti-banking C. Anti-finance D. Anti-competition