Question

Question 32 of 34 > Attempt 1 - Consider the AD-AS model in the graph where, in year 1, the economy is in equilibrium at point A. In year 2, the economy will reach point B and, without the appropriate economic policy, will not achieve its potential output. Price level (CPI) Potential GDPI Potential GDP2 ASI AS2 What type of policy should the federal government pursue? AD2 (with policy) AD2 -(without policy) O contractionary monetary policy O contractionary fiscal policy O expansionary monetary policy expansionary fiscal policy ADI GDP (trillions of dollars) If the policy is successful and the economy reaches point C what rate of growth will the economy experience between year I and year 2? Round your answer to one decimal place. P1 = 111.0 P2 = 124.0 Y1 = 13.40 Y2 = 14.80 rate of growth: 7.0 What is the inflation rate between year 1 and year 2? Round your answer to one decimal place. inflation rate: 14.8

Answer 1

In year 2, to reach potential GDP level, Aggregate demand needs to increase from AD2_{​​​​​without policy} to AD2 with policy. For that the government can use any of expansionary fiscal or expansionary monetary policy.

In year 1, long run potential GDP level is Y1 = 13.40 . In year 2, the potential GDP level is Y2 = 14.80

Therefore, rate of growth between year 1 and year 2 is : [(14.80 - 13.40)/13.40] * 100 = 10.5%

Inflation rate = [(P2- P1)/P1]* 100 = [(124 - 111)/111]*100 = 11.7%