Question

The economy has been growing at an average rate of​ 2.5% during the last year. The chairman of the Federal Reserve has stated that due to the economic growth and improvement in the labor​ markets, as evidenced by a declining unemployment​ rate, that the Fed stands ready to increase interest rates. ​ Meanwhile, the government is having to deal with a growing budget deficit and may need to borrow money from the public to fund its operations. This is easily done with the sale of Treasury bills and bonds. ​ However, such an increase in borrowing could affect the results of the​ Fed's actions. ​ Also, any tax reductions that occur will likely affect expenditures by both consumers and businesses. This in turn is expected to increase GDP assuming no surprise events that would negatively affect employment and economic growth.

1. The reaction of the Fed Chairman is that the economic growth during this phase of the economic cycle could produce higher ______

and the​ Fed's number one goal is for stable ______.

2. The phase of the business cycle given the facts in the statement above implies the economy is not in a ______ phase.  

3. The​ government's increased demand for funds attained from the bond markets implies that as the supply of

bonds ________ holding demand​ constant, the price will ________ and pushing interest rates _______.

4. If interest rates increase due to the Fed​ actions, the economic impact is a result of _______ policy.

5. If the Fed does nothing but the government decides to increase bond​ sales, the resulting impact on interest rates would be a result of _______ policy.

6. Economic variables that predict the near term future condition of the economy are grouped together and called ______ indicators.

7. Unemployment rates exceeding ______ ​(spell out the​ value) percent would indicate the economy could be heading towards

a _______.

8. If the economic environment described above​ continues, business managers could see their cost of labor _______ in the near term if the unemployment rate goes ________, and financing costs further ______ because of anticipated Fed actions. All these events could produce​ (inflation/deflation) _______ which could in turn cause the business cycle to reach its ​ (peak/trough) ______.

  

Answer 1

Theory: In this case economy is showing positive/expansion phase. Unemployment is going down and Real GDP is growing at a moderate rate. As aggregate demand is higher it may be feared that average price levels will go up and inflation will happen at higher rates. To avoid this, Fed is increasing interest rates. This is contractionary monetary policy.Govt. is selling bonds. It is a part of contractionary monetary policy and interest rates will go up.

1. The reaction of the Fed Chairman is that the economic growth during this phase of the economic cycle could produce higher inflation.

and the​ Fed's number one goal is for stable price levels.

2. The phase of the business cycle given the facts in the statement above implies the economy is not in a recession phase.  

3. The​ government's increased demand for funds attained from the bond markets implies that as the supply of

bonds increases holding demand​ constant, the price will go down and pushing interest rates down.

4. If interest rates increase due to the Fed​ actions, the economic impact is a result of contractionary monetary policy.

6. Economic variables that predict the near term future condition of the economy are grouped together and called Economic indicators.