Question

William McChesney Martin, who was Federal Reserve chairman from 1951 to 1970, was once quoted as saying, "The role of the Federal Reserve is to remove the punchbowl just as the party gets going." When he said "to remove the punchbowl," he meant to engage in (contractionary/expansionary) policy.In terms of the economy, "just as the party gets going" refers to a situation in which a real GDP (great than/less than) potential GDP, which will result in (increase in/decrease in) the inflation rate.

Answer 1

The answers are:

contractionary policy,

real GDP is greater than potential GDP,

increase in the inflation rate.

Step-by-step explanation:

In order to understand this phrase we must first understand the meaning of several words or concepts.

• Contractionary policy: monetary policy consisting in reducing the rate of monetary expansion by Federal Reserve (or in other countries the Central Bank). It is used to reduce inflation.
• Nominal GDP: total value of final goods and services produced in a country.
• Real GDP: the nominal GDP adjusted to inflation.
• Potential GDP: total amount of goods and services an economy would have been able to produce if it had been able to employ all of its available resources.
• Inflation: the rate at which the average price of products and services is rising. If this rate rises continuously then a unit of money will buy less products than before.

So one of the primary roles of the FED is to engage in contractionary policy (to try to reduce inflation) if the real GDP is greater than potential GDP (due to inflation), which will result in a further increase in the inflation rate.