4. The long-run effect of Federal Reserve action (or inaction) in the AD-AS mode

Question

4. The long-run effect of Federal Reserve action (or inaction) in the AD-AS model The following graph shows the short-run aggregate supply (SRAS) and aggregate demand (AD) curves for a fictional economy that is producing at point A (grey star symbol), which corresponds to the Intersection of the AD, and SRAS, curves. 100 T LRAS 90 No Intervention SRAS 80 SRAS2 70 60 50 AD2 40 AD, 30 23 4 5 78 10 QUANTITY OF OUTPUT (Trillions of dollars) than actual output, which means that the economy experiences According to the graph, potential output of this economy is Along SRA, wages would have been negotiated based on an expected price level of means that real wages are . Since the actual pnce level at point A is sa, this unemployment. had been negotiated, which will- If tne Fed does not intervene, these labor market conditions would cause nominal wages to , shifting the- curve to the , . Eventually, the economy would reach a new long-run equilibrium.

Explanation / Answer

a) potential output of the economy = 6 trillions

b) actual output = 5 trillions

it represents recessionary gap in the economy

C) $60

d) Lower than

E) Rise

(F) nominal wage to fall

G) AD right

H) increase the money supply

I ) fall the interest rate

J) increase the investment

K) shift the supply curve to

L) right

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