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Author Question: When the Fed is concerned with an inflationary gap it buys government securities. Is the previous ... (Read 22 times)

debasdf

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on: Jun 29, 2018
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?

Question 2

Resources that ________ protected by well-defined property rights are in ________ of being depleted.
 
  A) are; great danger
  B) are; absolutely no danger
  C) are not; the greatest danger
  D) are not; little danger


dantucker

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Reply #1 on: Jun 29, 2018
Answer to Question 1

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.

Answer to Question 2

C


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