Question

When current output is less than potential output, which of the given monetary policies is the federal reserve (the fed) likely to enact?.

Answer 1

The federal reserve is likely to enact that reserve requirement should be lower so that there will be a decrease the interest rate in the case when current output is less than potential output.

The Federal reserve does enhance the economy by reducing the interest rate that banks pay each other for overnight loans.

• However, if the current output is greater than potential output, then, the FED would try to reduce current output by increasing the interest rate.

In conclusion, the federal reserve is likely to enact that reserve requirement should be lower so that there will be a decrease the interest rate in this case when the current output is less than potential output.

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