Question

Price level (GDP Quess End of Chapter 4.4 AD) a without policy, b-with policy LRASp20 LRASpo21 Use the graph to the right to answer the following questions arthe Fed does not take any policy action, in 2021 the level of real GDP will be S rillion (enter your response to one decimal place) SRASpo20 SRAS 124 AD" 2021 122 AD 2021 120 AD2020 18.0 18.4 18.5 Real GDP (tilions of 2009 dollars)

I need the second picture but with the graph values of 2021

Answer 1

a. If the Fed does not take any policy action, in 2021 the level of real GDP will1 be $ 18.5 trillion and the price level will be 124 Without Fed intervention, equilibrium is attained at the intersection point of SRAS2021 and AD*2021 curves. Level of real GDP corresponding to this point is $18.5 trillion and corresponding price level is 124. b. If the Fed wants to keep real GDP at this potential level in 2021, it should use contractionary monetary policy. This means that the trading desk should be selling treasury bills Fed should implement contractionary monetary policy As per the given figure, the real GDP level is higher than that of the potential level of output. Therefore Fed should implement contractionary policy to bring back output to the potential level The Treasury desk should sell the treasury bills in the market. This wil1 extract the money supply from the market and thus causes a fall in money supply c. If the Fed takes no policy action, the inflation rate in 2021 will be 3.33% If the Fed uses monetary policy to keep real GDP at its full employment, the inflation rate in 2021 will be 1.67% Inflation rate can be calculated as taking change in price levels 124-120 100 3.33% Inflation rate 120 This is the inflation rate without Fed Policy If Fed uses contractionary monetary policy, then the price level would be 122 124-122 *100 1.67% 120 Inflation rate =