6. Monetary policy and the problem of inflationary and recessionary gaps Accordi

Question

6. Monetary policy and the problem of inflationary and recessionary gaps

According to the graph, the potential output of this economy is ($9 trillion/$10 trillion/$11 trillion/$13 trillion/$15 trillion) .

Since real GDP is currently $11 trillion (as shown by point A), this level of potential output means there is currently (a recessionary gap/an inflationary gap) of ($1 trillion/$2 trillion/$3 trillion/$4 trillion/$5 trillion) .

On the previous graph, place the tan point (dash symbol) at the new long-run equilibrium output and price level if the Fed does not intervene. (Assume there are no feedback effects on the curve that does not shift.)

Now suppose the Fed chooses to intervene in an effort to move the economy more quickly back to its potential output. To do so, the Fed will (increase/decrease) the money supply, which will (increase/decrease) the interest rate, thereby giving firms an incentive to (increase/decrease) investment, shifting the (AD/LRAS/SRAS) curve to the (left/right) .

On the previous graph, place the black point (plus symbol) at the new long-run equilibrium output and price level if the Fed intervenes in this way and successfully brings the economy back to long-run equilibrium. (Again, assume there are no feedback effects on the curve that does not shift.)

Compare your answers from the previous few questions. If the Fed does not intervene, the economy will likely have relatively high (unemployment/inflation) . On the other hand, if the Fed does intervene, it risks causing relatively high (unemployment/inflation) , if it changes the money supply too much.

please fill out the graph and the fill in the blanks please

Explanation / Answer

According to the graph, the potential output of this economy is $13 trillion .

Since real GDP is currently $11 trillion (as shown by point A), this level of potential output means there is currently a recessionary gap of $2 trillion.

On the previous graph, place the tan point (dash symbol) at the new long-run equilibrium output and price level if the Fed does not intervene which is point (13, 140)

Now suppose the Fed chooses to intervene in an effort to move the economy more quickly back to its potential output. To do so, the Fed will increase the money supply, which will decrease   the interest rate, thereby giving firms an incentive to increase investment, shifting the AD curve to the right .

On the previous graph, place the black point (plus symbol) at the new long-run equilibrium output and price level if the Fed intervenes in this way and successfully brings the economy back to long-run equilibrium which is at the point (13,150)

Compare your answers from the previous few questions. If the Fed does not intervene, the economy will likely have relatively high unemploynment . On the other hand, if the Fed does intervene, it risks causing relatively high inflation , if it changes the money supply too much.

If you don't understand anything then comment, I'ill revert back on the same. :)

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.