Choices are: Increases Decreases Does not change What can we expect from the Fed

Question

Choices are:

Increases

Decreases

Does not change

What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium? A. The Fed will pursue an expansionary monetary policy. B. The Fed will pursue a contractionary fiscal policy. C. The Fed will pursue an expansionary 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: Price level: Unemployment:

Explanation / Answer

Assuming the labels are Year, Potential GDP, Actual GDP Price Level

The government should go for expansionary fiscal policy to close the output gap

Actual GDP will rise

Potential GDP does not change

Unemployment will fall and

Price level will rise.

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