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 Contractionary monetary policy Contractionary fiscal policy Expansionary fiscal 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

1. Option D is correct.

At point B in the graph, the economy is above its potential GDP1 that means its into an inflationary gap situation. Expanding fiscal policy would increase the demand and the AD curve would shift to the right and reach point C.

2. Growth rate is calculated as :

[GDP for year 2 - GDP for year 1]/GDP for year 1*100

Plugging in the values, we get,

Growth rate = [14.40 - 12.40]/12.40*100

Growth rate = 16.1%.

3. Inflation rate is calculated as ;

[CPI in year 2 - CPI in year 1]/CPI in year 1

Plugging in the values, we get,

Inflation rate = [121 - 108]/108*100

Inflation rate = 12%.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

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