Question

Under a k-percent rule, if the economy goes into expansion, the fed would :

a. none of the above answers is correct.
b. raise the federal funds rate.
c. lower the federal funds rate.
d. lower tax rates to keep revenue constant.
e. increase the quantity of money.

Answer 1

During an economic expansion, the Fed is likely to raise the federal funds rate to prevent inflation and overheating of the economy, so the correct answer is (b) raise the federal funds rate.

Step-by-step explanation:

Under a k-percent rule, if the economy goes into expansion and there is a concern about inflation, the Federal Reserve (Fed) would typically take actions to prevent the economy from overheating. This would involve restrictive monetary policy, such as raising the federal funds rate to dampen economic activity and control inflation. Therefore, in response to the student's multiple-choice question, the correct answer would be (b) raise the federal funds rate.

The rationale for raising the federal funds rate during economic expansion is to increase the cost of borrowing, thereby slowing down investment and spending, which can help moderate economic growth and prevent excessive inflation. This approach stands in contrast to expansionary monetary policy, where the Fed would lower interest rates or increase the money supply to stimulate the economy during a recession.