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AP® Macroeconomics

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Congress, Fiscal Policy, and FED Activities

APMACR-TKJGJ4

Suppose Marginal Propensity to Save is .25 and the economy is in a mild recession \$100 Billion below natural unemployment equilibrium. Assume Congress decides to increase Government expenditures \$50 Billion without raising new tax revenue as a fiscal move to correct the economy.

What is most logical action the FED would take following such a decision by Congress?

A

Increase the Reserve Requirement.

B

Leave policy unchanged.

C

Reduce its T-Bill holdings by selling on the open market.

D

Decrease the Federal Funds Target Rate.

E

Encourage Congress to increase spending another $100 Billion.