Consider the following AD-AS model where, in Year 1, the economy is in equilibri

Question

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 economic policy, will not achieve its potential output. What type of policy should the federal government pursue? Expansionary monetary policy Expansionary fiscal policy Contractionary fiscal policy Contractionary monetary policy If the policy is successful and the economy 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

B to C can be reached by exapansionary fiscal polict taken by Government.

Rate = (Final Value - Initial Value / Initial Value) x100

Growth rate of GDP = { (14.80 - 12.70) / 12.70 } x 100= 16.53% or 17%

Inflation = {(118 - 102) / 102} x100 = 15.68 % or 16%

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