Refer to Table 26-4. Suppose the following table illustrates the values of real and potential GDP and the price level if the Fed does not vote to change their current policy to be more contractionary or expansionary

If the Fed wants to keep real GDP at its potential level in 2017, should the Fed use a contractionary or expansionary policy? How should it conduct open market operations to achieve its goal?

The information in the table indicates that if the Fed does not vote to change their current policy to be more contractionary or expansionary, then real GDP will fall below potential GDP in 2017. To keep the economy at potential GDP in 2017, the Fed should use expansionary monetary policy. This would mean that the Fed should direct the trading desk to buy U.S. Treasury bills. If this is done, reserves in the banking system will increase, banks can increase the number of loans, and this should raise the money supply and lower the interest rate.