Question

In one of his weekly broadcasts, the Federal Reserve Chairman remarked that inflation had begun to tick upward. However, unemployment in the U.S. was still quite high and economic growth had slowed. With short-term interest rates close to 0 (zero), the Chair did not visualize that ____________ policy would be able to do anything for the high unemployment problem. He felt that _______ policy would be more useful for bolstering employment, but that would require local and state governments and the federal government to provide tax breaks for corporations.
A. Fiscal , federal
B. Federal, state
C. Fiscal, monetary
D. Monetary, fiscal

Answer 1

Answer:

D) Monetary, fiscal

Explanation:

The Fed's dual mandate is to first promote a strong economy, but at the same time it must promote maximum employment, stable prices and moderate long term interest rates.

Monetary policy is carried out by the Fed through open market operations where it purchases or sells US securities, decreasing or increasing interest rates, and increasing or decreasing the money supply.

But if the interest rates are near 0, then the actions of the Fed are very limited regarding an expansionary monetary supply that would boost the economy and lower unemployment. There is basically no more room for lowering the interest rates.

So that means that the government must modify its fiscal policy to try to boost the economy. The government can either by increase spending, decrease taxes or a mixture of both. In this particular case, the Chairman of the Fed favors lowering decreasing taxes.