Question

Unemployment is on the rise though inflation is quite low. Gross Domestic Product is rising but more slowly than the goal rate. The Federal Reserve may buy government securities in open market operations in order to:

A. increase the money supply and encourage economic growth.

B. decrease the money supply and encourage people to save in difficult times.

C. give consumers more money to open their own businesses.

D. force the banks to stop giving out loans in an uncertain economy.

Answer 1

Answer:

A) increase the money supply and encourage economic growth.

Explanation:

Usually the unemployment rate is inversely related to the inflation rate: lower inflation = higher unemployment rate.

If the inflation rate is too low, that means that the economy is not growing since demand for goods and services is too slow. Private consumption is the largest component of the GDP, therefore if it slows down, the economy will suffer.

An expansionary monetary policy is carried out by the Fed when it purchases securities, and its whole purpose is to increase the money supply, lower interest rates and boost economic growth.

Answer 2

Answer:

The correct answer is A, "increase the money supply and encourage economic growth."

Explanation:

I got it correct on the test. I hope this helps!