Question

PLEASE HELP ASAP FOR ECONOMICS

Scenario B


Reports of price increases for everyday goods begin to dominate the news. People are complaining that their wages and salaries are not keeping pace with the cost of living. Most people being interviewed have jobs, and the national unemployment rate is low. However, many commonly remark that they are looking for second jobs or jobs that pay more because basics like food and clothing cost them so much more than a year ago.


Would the Fed address the scenario with expansionary or contractionary policy? Explain.




What is a specific monetary action the Fed might use in this scenario? Identify the tool and how the Fed would use it. Explain how this would address the scenario.




What is a specific fiscal action that Congress might use in this scenario?

Answer 1

A. Contractionary. Since they are complaining about the value of their salaries going down, this means that there is inflation, which means that there is too much money in circulation currently. So, the Fed would adopt a contractionary policy to decrease the money supply.

B. The Fed might sell bonds to reduce the money supply. As people purchase bonds, the Fed receives the money which means that the money is out of circulation. This reduces the amount of money currently in circulation, and thus increases the value of the money left.

C. The government would increase taxes and reduce government spending to mitigate the effects of inflation.