6. Monetary policy and the problem of inflationary and recessionary gaps On the following graph, the economy is producing at point A (grey star symbol), which corresponds to the intersection of the AD, and SRAS, curves. The Federal Reserve ("the Fed") is considering whether to intervene in an effort to bring the economy back to its potential. Plot the "No Intervention" and "If Fed Intervenes" on the? 180 175 LRAS graph SRAS₂ This is how the "No Intervention" would like on the graph PRICE LEVEL 170- 165 160 No Intervention SRAS₁ A 155 AD₁ 150 AD2 145 140 9 10 11 12 13 14 15 16 17 REAL GDP (Trillions of dollars) ++ If Fed Intervenes This is how the "If Fed Intervenes" would like on the graph In this economy, the Natural Real GDP is $9 trillion, 11 trillion, $13 trillion, $10 trillion, $15 trillion a recessionary gap or Since Real GDP is currently $15 trillion (as shown by point A), this level of output means there is currently an inflationary gap of $1 trillion, $2 trillion, $4 trillion, $5 trillion, $3 trillion On the previous graph, place the tan point (dash symbol) at the new long-run equilibrium output and price level if the Fed does not intervene. (Assume there are no feedback effects on the curve that does not shift.) Now suppose the Fed chooses to intervene in an effort to move the economy more quickly back to its potential output. To do so, the Fed will increase or decrease the money supply, which will the interest rate, thereby giving firms an incentive to increase or decrease investment, shifting increase or decrease the curve to the SRAS, AD, or right or left LRAS On the previous graph, place the black point (plus symbol) at the new long-run equilibrium output and price level if the Fed intervenes in this way and successfully brings the economy back to long-run equilibrium. (Again, assume there are no feedback effects on the curve that does not shift.) Compare your answers from the previous few questions. If the Fed does not intervene, the economy will likely have relatively high unemployment or inflation . supply too much. On the other hand, if the Fed does intervene, it risks causing relatively high unemploymen or, if it changes the money inflation
6. Monetary policy and the problem of inflationary and recessionary gaps On the following graph, the economy is producing at point A (grey star symbol), which corresponds to the intersection of the AD, and SRAS, curves. The Federal Reserve ("the Fed") is considering whether to intervene in an effort to bring the economy back to its potential. Plot the "No Intervention" and "If Fed Intervenes" on the? 180 175 LRAS graph SRAS₂ This is how the "No Intervention" would like on the graph PRICE LEVEL 170- 165 160 No Intervention SRAS₁ A 155 AD₁ 150 AD2 145 140 9 10 11 12 13 14 15 16 17 REAL GDP (Trillions of dollars) ++ If Fed Intervenes This is how the "If Fed Intervenes" would like on the graph In this economy, the Natural Real GDP is $9 trillion, 11 trillion, $13 trillion, $10 trillion, $15 trillion a recessionary gap or Since Real GDP is currently $15 trillion (as shown by point A), this level of output means there is currently an inflationary gap of $1 trillion, $2 trillion, $4 trillion, $5 trillion, $3 trillion On the previous graph, place the tan point (dash symbol) at the new long-run equilibrium output and price level if the Fed does not intervene. (Assume there are no feedback effects on the curve that does not shift.) Now suppose the Fed chooses to intervene in an effort to move the economy more quickly back to its potential output. To do so, the Fed will increase or decrease the money supply, which will the interest rate, thereby giving firms an incentive to increase or decrease investment, shifting increase or decrease the curve to the SRAS, AD, or right or left LRAS On the previous graph, place the black point (plus symbol) at the new long-run equilibrium output and price level if the Fed intervenes in this way and successfully brings the economy back to long-run equilibrium. (Again, assume there are no feedback effects on the curve that does not shift.) Compare your answers from the previous few questions. If the Fed does not intervene, the economy will likely have relatively high unemployment or inflation . supply too much. On the other hand, if the Fed does intervene, it risks causing relatively high unemploymen or, if it changes the money inflation
Chapter1: Making Economics Decisions
Section: Chapter Questions
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TOPIC: Monetary policy and the problem of inflationary and recessionary gaps
Transcribed Image Text:6. Monetary policy and the problem of inflationary and recessionary gaps
On the following graph, the economy is producing at point A (grey star symbol), which corresponds to the intersection of the AD, and
SRAS, curves. The Federal Reserve ("the Fed") is considering whether to intervene in an effort to bring the economy back to its potential.
Plot the "No Intervention" and "If Fed Intervenes" on the?
180
175
LRAS
graph
SRAS₂
This is how the "No
Intervention" would like
on the graph
PRICE LEVEL
170-
165
160
No Intervention
SRAS₁
A
155
AD₁
150
AD2
145
140
9
10
11
12
13
14
15
16
17
REAL GDP (Trillions of dollars)
++
If Fed Intervenes
This is how the "If Fed
Intervenes" would like
on the graph
In this economy, the Natural Real GDP is $9 trillion, 11 trillion, $13
trillion, $10 trillion, $15 trillion
a recessionary gap or
Since Real GDP is currently $15 trillion (as shown by point A), this level of output means there is currently an inflationary gap of
$1 trillion, $2 trillion, $4
trillion, $5 trillion, $3 trillion
On the previous graph, place the tan point (dash symbol) at the new long-run equilibrium output and price level if the Fed does not intervene.
(Assume there are no feedback effects on the curve that does not shift.)
Now suppose the Fed chooses to intervene in an effort to move the economy more quickly back to its potential output. To do so, the Fed will
increase or
decrease
the money supply, which will
the interest rate, thereby giving firms an incentive to
increase or decrease
investment, shifting
increase or decrease
the
curve to the
SRAS, AD, or
right or left
LRAS
On the previous graph, place the black point (plus symbol) at the new long-run equilibrium output and price level if the Fed intervenes in this way and
successfully brings the economy back to long-run equilibrium. (Again, assume there are no feedback effects on the curve that does not shift.)
Compare your answers from the previous few questions. If the Fed does not intervene, the economy will likely have relatively high
unemployment or
inflation
.
supply too much.
On the other hand, if the Fed does intervene, it risks causing relatively high unemploymen or, if it changes the money
inflation
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