The long-run effect of Federal Reserve action (or inaction)in the AD-AS model Th
ID: 1216246 • Letter: T
Question
The long-run effect of Federal Reserve action (or inaction)in the AD-AS model The following graph shows the short-run aggregate supply (SRAS) and aggregate demand (AD) curves for a fictional economy that is producing at point A (grey star symbol), which corresponds to the intersection of the AD_1 and SRAS_1 curves. According to the graph, actual output of this economy is than potential output, which means that the economy experiences. Along SRA5_1, wages would have been negotiated based on an expected price level of. Since the actual price level at point A is 90, this means that real wages are had been negotiated, which will unemployment. If the Fed does not intervene, these labor market conditions would cause nominal wages to shifting the curve to the. Eventually, the economy would reach a new long-run equilibrium. On the previous graph, place the purple point (diamond symbol) at the new long-run equilibrium output and price level if the Fed intervenes. 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 the money supply, which will the interest rate, thereby giving firms an incentive to investment, shifting the curve. On the previous graph, place the green point (triangle symbol) at the new long-run equilibrium output and price level if the Fed does not intervene and successfully brings the economy back to long-run equilibrium. Compare your answers to the previous few questions. If the Fed does not intervene, the economy will likely have relatively. On the other hand, if the Fed does intervene, it risks causing relatively, especially if it changes the money supply too much.Explanation / Answer
Blank 1. More than the potential output. (potential output = $10 trillion, short run output = $11 trillion)
Blank 2. Inflationary gap.
Blank 3. $80
Blank 4. lower
Blank 5. increase unemployment.
Blank 6. Increase
Blank 7. Short run AS
Blank 8. Left.
Blank 9. Decrease the money supply
Blank 10. Increases the interest rate.
Blank 11. decreasse investment (because it is now expensive)
Blank 12. AD curve to the left.
Blank 13. High prices
Blank 14. Low prices
Blank 8.
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