If the Fed is concerned about inflation, in the short run what is the proper monetary policy to restore price stability? What actions can the Fed undertake to restore price stability?
If the Fed is concerned about inflation, in the short run what is the proper
monetary policy to restore price stability? What actions can the Fed undertake
to restore price stability?
Answer: In order to avoid the inflation, the Fed needs to decrease aggregate demand. To decrease aggregate demand, the Fed must raise the federal funds rate and decrease the quantity of money. To do so, the Fed will sell government securities, which decreases banks' reserves because the reserves are used to pay the Fed for the government securities. The decrease in banks' reserves raises the federal funds rate and decreases the quantity of money.
Answer:
ReplyDeleteIn order to avoid the inflation, the Fed needs to decrease aggregate demand. To decrease aggregate demand, the Fed must raise the federal funds rate and decrease the quantity of money. To do so, the Fed will sell government securities, which decreases banks' reserves because the reserves are used to pay the Fed for the government securities. The decrease in banks' reserves raises the federal funds rate and decreases the quantity of money.