Question

2 pts Question 13 Use the figure below to answer the following questions. Inflation rate (T) LRAS SRAS (ET = 9%) SRAS (En = 2%) 9% 8% - 2%. AD1 -3% 3% Real GDP growth rate

Answer 1

Here we have given that the economy is experiencing 9% inflation and 3% GDP growth, => the economy is given by the intersection of “blue AD” and “LRAS”.

Now, let’s assume that the entrepreneurs become more pessimistic, => the AD decreases and the new AD is given by the “red AD”, => the new SR equilibrium is given by the intersection of “red AD” and “upper SRAS”, => the inflation and GDP growth are given by, => 8% and (-3%) respectively.

Now, the Fed can speed up the process of restoring original economic growth rate at 3% by increasing money supply. So, the AD will shift right and the new AD is given by the “blue AD”, => in the LR the equilibrium is given by the intersection of “blue AD” and LRAS curve. So, here the required money supply growth is “9-2 = 7%” the vertical distance between the two AD curves. So, here the inflation is given by “9%”.