Hypothetical information

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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