If the inflation rate is already 6 percent per year, the Fed should?

1.       People borrowing to buy a home usually have to borrow a large sum of money. Explain how monetary policy is likely to affect the demand for homes.

2.       Suppose there is a sharp rise in oil prices that sends the price of gasoline to $6 per gallon. a) If the output gap is large and positive, the Fed should _______ the fed funds rate. b) If the output gap is negative, the Fed should _______ the fed funds rate. c) If the inflation rate is already 6 percent per year, the Fed should _______ the fed funds rate.

3.       The Fed’s tool for helping financial institutions that are running short on money, even when the economy is not in crisis, is _______  a) opening the discount window. b) lowering reserve requirements. c) lowering the fed funds rate. d) raising the fed funds rate.

Solution:

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