In traditional (before 2008) analysis, an autonomous increase in investment spending when the economy is at full employment will cause the Fed to seek a lower target for the federal funds rate by buying securities in the open market. True False

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India Leach

13 August, 00:34

In traditional (before 2008) analysis, an autonomous increase in investment spending when the economy is at full employment will cause the Fed to seek a lower target for the federal funds rate by buying securities in the open market. True False

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Nicole Mcbride · Answer 1

Answer: False

Explanation:

When the economy is at full employment, an increase in investment spending will lead to inflation. The aim of the Feds at this stage is to seek contractionary measures such as buying securities in the open market.

The Feds will also seek a higher target for the Federal Funds rate. The higher the Federal Funds rate is, the higher the interest rate on borrowing becomes. This is also true for lower Federal Funds rate which reduces the interest rates on borrowing. This is a contractionary measure.