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In a certain country, demand for goods and services is outstripping supply. Inflation is running at 10%, well above the target level of 2%.

a. How would you use monetary policy to lower the inflation rate?

b. How would you use fiscal policy to lower the inflation rate?

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Kritika Krishnakumar
Kritika KrishnakumarLv10
28 Sep 2019

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Related questions

1. Lowering interest rates is a common monetary policy tool used to;

A. stimulate economic growth.

B.lower inflation.

C.decrease government borrowing costs.

D.none of these

2. Lower interest rates can also;

A.push prices lower.

B.push prices were higher.

C.lead to stagnation.

D.none of these

3. When central banks increase the money supply and take steps to lower interest rates it is known as;

A.expansionary monetary policy.

B.an inflation hawk stance.

C.contractionary monetary policy.

D.expansionary fiscal policy.

4. When Governments increase expenditures it is known as;

A.expansionary fiscal policy.

B.Contractionary fiscal policy.

C.contractionary monetary policy.

D.expansionary monetary policy.

How does an autonomous tightening or easing of monetary policy by the Fed affect the MP curve?

A. When the Fed decides to lower the real interest rate at any given inflation rate, the MP curve shifts upward. Monetary policy easing, a decision to raise the real interest rate at any given inflation rate, shifts the MP curve downward.

B. When the Fed decides to raise the real interest rate at any given inflation rate, the MP curve shifts upward. Monetary policy easing, a decision to lower the real interest rate at any given inflation rate, shifts the MP curve downward.

C. When the Fed decides to raise the real interest rate at any given inflation? rate, the MP curve shifts downward. Monetary policy easing, a decision to lower the real interest rate at any given inflation rate, shifts the MP curve upward.

D. None of the above is correct.

If you were a policy maker and were faced with the issues below, identify what you would recommend be done (increase/decrease; buy/sell) using each tool for the scenario (answer on each line). Suppose that the natural rate of unemployment is 4%.

#1 Unemployment = 10%; Inflation = 1%

Fiscal Policy -- Business Taxation _______________________________

Household Taxation ______________________________

Government Expenditures _________________________

Monetary Policy -- OMO _________________________________________

Discount Rate __________________________________

Reserve Ratio __________________________________

Explain logic ___________________________________________________

#2 Unemployment = 1%; Inflation = 10%

Fiscal Policy -- Business Taxation _______________________________

Household Taxation ______________________________

Government Expenditures _________________________

Monetary Policy -- OMO _________________________________________

Discount Rate __________________________________

Reserve Ratio __________________________________

Explain logic ___________________________________________________

#3 Unemployment = 10%; Inflation = 10%

Fiscal Policy -- Business Taxation _______________________________

Household Taxation ______________________________

Government Expenditures _________________________

Monetary Policy -- OMO _________________________________________

Discount Rate __________________________________

Reserve Ratio __________________________________

Explain logic ___________________________________________________

#4 Unemployment = 4%; Inflation = 1%

Fiscal Policy -- Business Taxation _______________________________

Household Taxation ______________________________

Government Expenditures _________________________

Monetary Policy -- OMO _________________________________________

Discount Rate __________________________________

Reserve Ratio __________________________________

Explain logic ___________________________________________________

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