Question : Table 17-4 Year Potential Real GDP Real GDP : 1244849

 

 

Table 17-4

Year

Potential Real GDP

Real GDP

Price Level

          2014

         $15.1 trillion

         $15.1 trillion

           150

          2015

           15.4 trillion

           15.3 trillion

           153

 

26) Refer to Table 17-4. Suppose the following table illustrates the values of real and potential GDP and the price level, if the Fed does not vote to change their current policy to be more contractionary or expansionary. If the Fed wants to keep real GDP at its potential level in 2015, should the Fed use a contractionary or expansionary policy? How should it conduct open market operations to achieve its goal?

 

Table 17-5

Year

Potential Real GDP

Real GDP

Price Level

          2014

         $14.4 trillion

         $14.4 trillion

           144

          2015

           14.7 trillion

           14.5 trillion

           146

 

27) Refer to Table 17-5. Suppose the table above illustrates the values of real and potential GDP and the price level, if the Fed does not vote to change their current policy to be more contractionary or expansionary. Suppose that the Fed uses an appropriate policy and is successful in keeping real GDP at potential in 2015. State whether each of the following will be higher or lower than if the Fed had taken no action:

a.Real GDP

b.Potential real GDP

c.The price level

d.The unemployment rate

 

Table 17-6

Year

Potential Real GDP

Real GDP

Price Level

          2014

         $15.1 trillion

         $15.1 trillion

           150

          2015

           15.4 trillion

           15.6 trillion

           155

 

28) Refer to Table 17-6. Suppose the table above illustrates the values of real and potential GDP and the price level, if the Fed does not vote to change their current policy to be more contractionary or expansionary. If the Fed wants to keep real GDP at its potential level in 2015, should the Fed use a contractionary or expansionary policy? Should it raise or lower its interest rate target? How should it conduct open market operations to achieve its goal?

 

Table 17-7

Year

Potential Real GDP

Real GDP

Price Level

          2012

         $14.2 trillion

         $14.2 trillion

           154

          2013

           14.8 trillion

           14.6 trillion

           156

 

29) Refer to Table 17-7. Suppose the table above illustrates the values of real and potential GDP and the price level, if the Fed did not vote to change their current policy to be more contractionary or expansionary. Suppose that the Fed used an appropriate policy and was successful in keeping real GDP at potential in 2013. Draw an aggregate demand and supply curve to illustrate your answer.

 

The economy starts in equilibrium in 2012 at point A, with the SRAS2012 curve intersecting AD2012 along the LRAS2012 curve. Real GDP is at its potential level of $14.2 trillion and the price level is at 154. Without a change in monetary policy, the AD2012 curve shifts to AD2013 (without policy) and the economy is in short-run equilibrium at point B. Because potential real GDP has increased from $14.2 trillion to $14.8 trillion, short-run equilibrium real GDP of $14.6 trillion is below the potential level. The price level has increased from 154 to 156. With policy, the AD2012 curve shifts to AD2013(with policy) and the economy is in equilibrium at point C. Real GDP is at its potential level of $14.8 trillion. We don’t have enough information to be sure of the exact level of the new equilibrium price level. We do know that it will be higher than 156. It is shown rising to 158 in the graph. The inflation rate is 1.3% without policy and 2.6% with policy.

 

30) Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and short-run aggregate supply such that the condition of the economy will induce the Federal Reserve to conduct an expansionary monetary policy. Briefly explain the condition of the economy and what the Federal Reserve is attempting to do.