In the AD-AS model to the right, the economy is initially in equilibrium at poin
ID: 1108821 • Letter: I
Question
In the AD-AS model to the right, the economy is initially in equilibrium at point A. Changes occur What type of policy might Congress use to point C? that result in the economy moving to point B. Price level Potential GDP1 Potential GDP2 AS1 AS2 return the economy to long-run equilibirum at Expansionary monetary policy Contractionary monetary policy O Expansionary fiscal policy O AD2 w/o policy 124.0 AD2 (W/policy) Contractionary fiscal policy 120.0 AD1 If the policy is successful and the economy reaches point C, what rate of growth will the economy experience? (Round your answer to one decimal place.) 14.20 15.00 Number GDP in $ trillions What is the inflation rate? (Round your answer to one decimal place.) NumberExplanation / Answer
At point B, the output is higher than the potential output. So, the economy is facing inflationary pressure. Therefore, contractionary monetary policy needs to be implemented to bring down output and reach the equilibirum point of B.
Answer 1: Contractionary monetary policy
The GDP went up from $14.2 trillion to $15 trillion The growth rate of the economy = (15 - 14.20)/14.20 * 100 = 0.80/14.20 * 100 = 5.63%
Answer 2: 5.63%
The price level reached from 120 to 124. The inflation rate = (124 - 120)/120 * 100 = 4/120*100 = 3.33%
Answer 3: 3.33%