Question

QUESTION 10 0.36 points Save Answer LRAS Aggregate price level P, AD, Real GDP In response to the high unemployment rate and low level of real GDP at point El in the diagram above, the Federal Open Market Committee (the decision-making body of the Federal Reserve) decides to engineer a decrease in interest rates. If no other disturbances occurred, and the Fed calibrated its policy perfectly so that full employment equilibrium was restored, what price level would prevail at the new long-run equilibrium 0.37 points Save Answer QUESTION 11 fer to the graph in the previous problem. If policymakers had decided to do nothing, the economy's self. Ref would have eventually closed the recessionary gap. Had that been the case, at the new full correcting mechanism employment equilibrium, the price level would have been equal to

Answer 1

10. A decrease in the interest rate is an expansionary policy which results in the shift of the demand curve to the right. This will raise the price level to P2 from P1. So the long run equilibrium price is P2 producing the potential output.

11. As the economy is producing a level of output less than the potential level and at a lower price , in the long run the input prices as well as the expected inflation decreases. This will increase the supply in the economy which will shift the supply curve to the right and thus producing potential output. The price level will be P3.