Concept: Monetary Policy Data Table Consider the following table Year 2012 2013

Question

Concept: Monetary Policy Data Table Consider the following table Year 2012 2013 Potential GDP Real GDP $14.7 trillion $15.4 trillion Price Level 110 114 $15.3 trillion What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium? O A. OB. The Fed will pursue an expansionary monetary policy. The Fed will pursue an expansionary fiscal policy C. The Fed will pursue a contractionary fiscal policy D. The Fed will pursue a contractionary monetary policy If the Fed's policy is successful, what is the effect on the following indicators? Actual real GDP Potential real GDP: 1 Price level: Unemployment

Explanation / Answer

Option D. As the price level or inflation is increasing in order to reduce it, the Fed would use contractionary monetary policy.
Actual real GDP decreases
Potential real GDP does not change
Price level decreases
Unemployment increases
As Fed tries to reduce inflation through contractionary monetary policy, the money supply reduces which would lower real GDP and price level causing the Real GDP = potential GDP

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