The adoption of a tighter, more anti-inflationary monetary policy might be politically unpopular because the Fed will:

A. increase the target inflation rate, decreasing the real interest rate at every rate of inflation, causing an inflationary gap and lowering unemployment above the natural rate.

B. lower the target inflation rate, increasing the real interest rate at every rate of inflation, causing a recessionary gap and increasing unemployment above the natural rate.

C. increase the target inflation rate, lowering the real interest rate at every rate of inflation, causing a recessionary gap and increasing unemployment above the natural rate.

D. lower the target inflation rate, increasing the real interest rate at every rate of inflation, causing an inflationary gap and increasing unemployment below the natural rate.

Question

Business

Omar

6 January, 10:21

The adoption of a tighter, more anti-inflationary monetary policy might be politically unpopular because the Fed will:

A. increase the target inflation rate, decreasing the real interest rate at every rate of inflation, causing an inflationary gap and lowering unemployment above the natural rate.

B. lower the target inflation rate, increasing the real interest rate at every rate of inflation, causing a recessionary gap and increasing unemployment above the natural rate.

C. increase the target inflation rate, lowering the real interest rate at every rate of inflation, causing a recessionary gap and increasing unemployment above the natural rate.

D. lower the target inflation rate, increasing the real interest rate at every rate of inflation, causing an inflationary gap and increasing unemployment below the natural rate.

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Answers (1)

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Coleman Rivers · Answer 1

The correct answer is B)

This is almost self explanatory.

Explanation:

A tighter and more anti-inflationary monetary policy will be politically unpopular because it reduces the amount of money in circulation.

Business owners will cringe at it because the rate at which they can access capital or investible funds from the commercial banks or other financial institutions will have taken an upward spiral.

Because business owners can no longer leverage off bank funds to operate their businesses, many may lay off workers thus creating unemployment.

Those who are being unemployed have less and less to spend and, this sort of economic move will attract unsavoury political responses though it is executed for the greater good.

On the other hand,

When there is too much money in circulation, it triggers inflation, in turn, reduces the spending power of businesses and consumers.

As inflation increases, and real income (purchasing power) reduces, Labour Unions begin to agitate for increment in their labour rates or wages. This puts a strain on the businesses who either increase and suffer lower bottom lines or are forced to cut down on demand for labour to satisfy the new wage rate being demanded.

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