In the AD-AS model to the right, the economy is initially in equilibrium at poin
ID: 1198023 • Letter: I
Question
In the AD-AS model to the right, the economy is initially in equilibrium at point A. Changes occur that result in the economy moving to point B. Note that potential GDP also changed to GDP2 ($15.20). Assume prices are flexible upward and sticky downward. What type of policy might the Fed use to return the economy to equilibrium at point C? Contractionary fiscal policy Expansionary monetary policy Expansionary fiscal policy Contractionary monetary policy If the policy is successful and the economy reaches point C, what rate of growth will the economy experience on the move from A to C? (Round your answer to one decimal place.) What is the inflation rate? (Round your answer to one decimal place.)Explanation / Answer
1.
In order to reach from point B to C, Fed should use contractionary monetary policy.
This will reduce the GDP in the economy, shifting it from B to C.
2.
Rate of growth = (15.20 – 14.40)/14.40 = 5.55%
3.
Inflation rate = (127-117)/117 = 8.55%