Consider the following AD-AS model where... Consider the following AD-AS model w

Question

Consider the following AD-AS model where...

Consider the following AD-AS model where , in Year 1, the economy is in equilibrium at Point A. In year 2, the economy will reach Point B and , without the appropriate ecenomic policy , will not achieve its potential output which is now GDP2. what type of policy should the federal governtment pursue? Contractionary monetary policy Expansionary monetary policy Aggregate supply increase policy . Neutral monetary policy If the policy is succesful and the ecenomy reaches Point c, what rate of growth will the economy experience between Year 1 and Year 2? (Round answer to the tenths place) what is the inflation rate between Year 1 and Year 2?(Round answer to the tenths place)

Explanation / Answer

(1) Expansionary monetary policy

An increase in money supply will increase aggregate demand, helping the economy reach the potential GDP level.

(2) Growth rate = (13.80/13) - 1 = 1.062 - 1 = 0.062 = 6.2%

(3) Inflation rate = % Change in price level = (118/105) - 1 = 1.124 - 1 = 0.124 = 12.4%

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