Suppose that the Federal Reserve is concerned that the US ec

Suppose that the Federal Reserve is concerned that the US economy is producing above the natural rate of output. What could it do to return the economy back to the Natural Rate of Output? Sell bonds to raise the interest rate Sell bonds to lower the interest rate Buy bonds to lower the interest rate Buy bonds to raise the interest rate Suppose that the Federal Reserve is concerned that the US economy is producing below the natural rate of output. What could it do to return the economy back to the Natural Rate of Output? Buy bonds to raise the interest rate Buy bonds to lower the interest rate Sell bonds to raise the interest rate Sell bonds to lower the interest rate

Solution

Because the Fed is concerned about rising inflation when output is above its natural rate, it will reduce money supply. This is done by selling government bonds in open market which will raise the interest rate. Select Sell bonds to raise interest rate.

Because the Fed is concerned about higher unemployment when output is below its natural rate, it will increase money supply. This is done by buying government bonds in open market which will reduce the interest rate. Select Buy bonds to reduce interest rate.