ECO Exam Review Part 1.docx - 1. The government...

1. The government underestimated the natural rate of unemployment and unnecessarily
enacted expansionary fiscal policy. How would the Federal Reserve be most likely to
respond to the effects of this policy?
a. Raise interest rate
a. Lower interest rate
a. Buy government bonds
a. Raise taxes
2. Based on the Federal Reserve’s response in question 1, what would be the likely effect?
3. The Federal Reserve would most likely receive criticism for failing to do which of the
following things?
4. If the Federal Reserve does not intervene, and the economy continues to operate above