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Economics
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26 Nov 2019

Federal spending financed by a sale of Treasury bonds which are then purchased by the Fed

a) causes the monetary base to decline, but inflation to rise.

b) has no net effect on inflation.

c) causes both the monetary base and inflation to rise.

d) causes both the monetary base and inflation to decline.

e) causes the monetary base to rise, but inflation to decline.

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Bunny Greenfelder
Bunny GreenfelderLv2
1 Apr 2019
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Related questions

Assuming people have rational expectations:
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B) When the Fed uses monetary policy, people quickly realize the impact that will be created by the policy, adjust wages and prices, and inflation will adjust to the new expectations which means the policy will not affect the real GDP

C) When the government uses fiscal policy, then changes in the money supply will create quick adjustments in wages and prices which will not cause changes in real GDP

D) When the Fed uses monetary policy, people do not quickly adjust wages and prices, therefore, inflation will deviate from expectations and create fluctuations in real GDP

You are responsible for economic policymaking in your country. Your desire is to eliminate inflation, keeping prices absolutely stable at P = 100, no matter what happens to output. Currently, the economy is in equilibrium at Q = 3200 (where Q = potential GDP) and P = 100. You can use monetary and fiscal policies to affect aggregate demand but you cannot affect aggregate supply in the short run. How would you respond to the following scenarios?

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Explain and illustrate how each of these events would affect aggregate demand, aggregate supply, and prices, then explain how you would respond with economic policies.

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