Question

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. ? LRAS SRAS, 165 160 No Intervention SRAS2 155 150 If Fed Intervenes PRICE LEVEL 145 140 AD2 135 ADA 130 125 10 11 17 18 12 13 14 15 16 REAL GDP (Trillions of dollars)
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Answer 1

₃ & 14 trilions ( Natmal neal GDP -LRAS) veccssionary gopp ; $2 trillion ( As adpe national 14-12 = 2 CO, there is accessimary gap - 2) 7 P LRAS SRAS, SRAS 145t If fed intervenis A02 intervention 140 - No 135 AD, Y 14 } -- AD ; night MS to 5 c (If fed does not intervene, SRAS will increase.) increase decrease ; increase (red will increase increase which will decrease i, and thus i increases So, AD shifts rightword.) (If fed intervenes, will shift right). ment ; inflation (without intervention, u will be high and with Csode wand-poed witing lotion cienScarimer te brigu. ) unemployment;