Table 26-8 -Refer to Table 26-8. the Hypothetical Information in the Table

question 127

Essay

Table 26-8

-Refer to Table 26-8. The hypothetical information in the table shows what the values for real GDP and the price level would have been in 2019 if the Federal Reserve did not use monetary policy:
a. If the Fed wanted to keep real GDP at its potential level in 2019, should it have used an expansionary policy or a contractionary policy? Should the trading desk have bought T-bills or sold them?
b. Suppose the Fed's policy was successful in keeping real GDP at its potential level in 2019. State whether each of the following would be higher or lower than if the Fed had taken no action:
(i) Real GDP
(ii) Full-employment real GDP
(iii) The inflation rate
(iv) The unemployment rate
c. Draw an aggregate demand and aggregate supply graph to illustrate your answer. Be sure that your graph contains LRAS curves for 2018 and 2019; SRAS curves 2018 and 2019; AD curve for 2018 and 2019, with and without monetary policy actions; and equilibrium real GDP and the price level in 2019 with and without policy.

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