Scenario B

Reports of price increases for everyday goods begin to dominate the news. People are complaining that their wages and salaries are not keeping pace with the cost of living. Most people being interviewed have jobs, and the national unemployment rate is low. However, many commonly remark that they are looking for second jobs or jobs that pay more because basics like food and clothing cost them so much more than a year ago.

1. Would the Fed address the scenario with expansionary or contractionary policy? Explain.

2. What is a specific monetary action the Fed might use in this scenario? Identify the tool and how the Fed would use it. Explain how this would address the scenario.

3. What is a specific fiscal action that Congress might use in this scenario?

In the scenario of price increases dominating the news, the Fed would likely opt for an expansionary monetary policy approach, such as lowering the federal funds rate. Congress could consider fiscal actions like increasing government spending to help address the situation.

Explanation:

Expansionary monetary policy would be the approach the Fed would likely take in this scenario. This policy involves increasing the money supply and lowering interest rates to stimulate economic growth. An example of a specific monetary action the Fed might use is lowering the federal funds rate. By doing so, the Fed aims to encourage borrowing and spending, which can help boost economic activity and address the inflation caused by the rising prices.

Congress, on the other hand, might implement a fiscal action to address the situation. One potential fiscal action could be increasing government spending on programs that benefit the population, such as infrastructure projects or social welfare programs.

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