Table 17-2 -Refer to Table 17-2.The Hypothetical Information in the Table Shows

question 139

Essay

Table 17-2

-Refer to Table 17-2.The hypothetical information in the table shows what the values for real GDP and the price level will be in 2011 if the Federal Reserve does not use monetary policy:
a.If the Fed wants to keep real GDP at its potential level in 2011,should it use an expansionary policy or a contractionary policy? Should the trading desk buy T-bills or sell them?
b.Suppose the Fed's policy is successful in keeping real GDP at its potential level in 2011.State whether each of the following will 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 2010 and 2011;SRAS curves 2010 and 2011;AD curve for 2010 and 2011,with and without monetary policy actions;and equilibrium real GDP and the price level in 2011 with and without policy.

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Definitions:

Non-cash Charges

Expenses reported on the income statement that do not involve a direct cash outflow, such as depreciation or amortization.

Direct Materials Budget

A financial plan that estimates the cost of raw materials required for production.

Beginning Inventory

The value of goods available for sale or use at the start of an accounting period, carried over from the end of the previous period.

Budgets

Financial plans that estimate revenue and expenditures over a specific time period.