If the Fed wants to close a recessionary gap, should it buy or sell government securities? Why?
What will be an ideal response?
The Fed should lower the federal funds rate by purchasing government securities. When the Fed buys government securities, the quantity of money increases and quantity of loans increases. The increase in loans increases the supply of loanable funds so the real interest rate falls. As a result, consumption expenditure, investment, and net exports increase, which increases aggregate demand. The increase in aggregate demand increases real GDP, which is the policy required when real GDP is less than potential GDP, that is, when the economy has a recessionary ga
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Mr. Samuelson's current rates of purchase are such that the marginal utility of slacks is 18 and the marginal utility of ties for him is 5. If slacks and ties are priced at $12 and $2 respectively, it can be concluded that Mr. Samuelson:
A. Is spending too much on slacks and not enough on ties B. Is spending too much on ties and not enough on slacks C. Is spending his income in such a way as to maximize his satisfaction D. Should buy six times as many ties as he does slacks
As an individual earns additional income, the marginal utility of income tends to
A. Decrease. B. Increase. C. Remain constant. D. Shift toward the origin.