If There Is a Sudden Increase in Government Spending,which of the Following

question 113

Multiple Choice

If there is a sudden increase in government spending,which of the following should the Fed do if it wants to keep the price level steady?

• A) Do nothing,since the self-correcting mechanism will adjust the economy
• B) Sell bonds in the open market
• C) Wait,since the price level usually does not change when government spending increases
• D) Decrease the required reserve ratio
• E) Buy bonds in the open market.

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Definitions:

Price

The budgeted amount foreseen, called for, or remitted as remuneration for something.

Cup of Coffee

A typical measure for serving coffee, involving brewing ground coffee beans with hot water, often enjoyed as a beverage worldwide.

Gallon of Gasoline

A unit of measurement equal to 3.785 liters used for measuring the volume of gasoline.

Substitution Effect

Variations in consumption habits influenced by the change in prices of goods in comparison to each other, leading to a preference shift among consumers from one good to another.