Answered: Price level (GDP deflator, 2009 = 100)…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

With the onset of COVID-19, the Fed, led by Fed Chairman Jerome Powell, lowered its target interest rate (the federal funds rate) by 1.5 percentage points, to a range of 0.00-0.25 percent. This was done with 2 rate cuts during March 2020.

Consider the aggregate demand-aggregate supply diagram below, which represents the macroeconomy. Suppose the market is initially (with the onset of COVID) at an equilibrium at point A. What effect will the Fed's actions have on this economy?

Price level
(GDP deflator,
2009 = 100)
P1
LRAS₁
GDP*
SRAS1
Unemployment will increase.
Employment will decrease.
The rate of economic growth will increase.
The rate of inflation will decrease.
AD₁
GDP₁
Real GDP (trillions of 2009 dollars)

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