Consider the following table: Year Potential GDP Real GDP Price Level 2012 $14.9
ID: 1116008 • Letter: C
Question
Consider the following table:
Year
Potential GDP
Real GDP
Price Level
2012
$14.9
trillion
$14.9
trillion
110
2013
$15.3 trillion
$15.2
trillion
112
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
a contractionary
monetary policy.
B.
The Fed will pursue
an expansionary
fiscal policy.
C.
The Fed will pursue
an expansionary
monetary policy.
D.
The Fed will pursue
a contractionary
fiscal policy.
Year
Potential GDP
Real GDP
Price Level
2012
$14.9
Explanation / Answer
A. The Fed will pursue a contractionary monetary policy
As in 2013 Potential GDP is less than Real GDP and to bring it back to the equilibrium level it will have to lower the real GDP which can be done by pursuing contractionary monetary policy.