The hypothetical information in the following table shows
what the values for real GDP and the price level will be in
2019 if the Fed does not use monetary policy:
a. If the Fed wants to keep real GDP at its potential
level in 2019, should it use an expansionary policy
or a contractionary policy? Should the trading desk
buy Treasury bills or sell them?
b. Suppose the Fed’s policy is successful in keeping
real GDP at its potential level in 2019. State whether
each of the following will be higher or lower than if
the Fed had taken no action:
i. Real GDP
ii. Potential GDP
iii. The inflation rate
iv. The unemployment rate
c. Draw an aggregate demand and aggregate supply
graph to illustrate your answer. Be sure that your
graph contains LRAS curves for 2018 and 2019;
SRAS curves for 2018 and 2019; AD curves for
2018 and for 2019, with and without monetary policy
action; and equilibrium real GDP and the price
level in 2019, with and without policy.
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