Question

Recently released economic data provides evidence on inflation and economic growth. The core consumer price index (CPI) is stable, but the overall CPI has risen somewhat. This is because the core CPI excludes food and energy costs, which are sharply higher. These higher costs are causing the overall CPI index to rise and creating possible future inflationary pressures. Unemployment is low, and job growth remains positive, which indicates that the economy is continuing to expand.

2. Would you recommend raising or lowering the reserve requirement, raising or lowering the federal funds target rate, or buying or selling government securities on the open market? Explain why

Answer 1

In this scenario, with rising food and energy costs leading to potential inflationary pressures, the Federal Reserve can consider raising the reserve requirement, raising the federal funds target rate, or selling government securities on the open market to control inflation.

Step-by-step explanation:

In this scenario, where the overall CPI has risen due to higher food and energy costs, the Federal Reserve can consider taking measures to address potential future inflationary pressures. To do so, they can choose to raise the reserve requirement, raise the federal funds target rate, or sell government securities on the open market.

Raising the reserve requirement means that banks will need to hold a higher percentage of their deposits as reserves, reducing the amount of money available for lending. This can help control inflation by reducing the amount of money in circulation.

Raising the federal funds target rate is another option. This is the interest rate at which banks lend to each other overnight. When the rate is higher, borrowing becomes more expensive, which can discourage borrowing and reduce inflationary pressures.

Alternatively, the Federal Reserve can choose to sell government securities on the open market. This would decrease the money supply, as individuals and institutions buy these securities with their excess cash. Again, reducing the money supply can help control inflation.