3. Theeffect of Federal Reserve action (or inaction) in the AD-AS model The foll

Question

3. Theeffect of Federal Reserve action (or inaction) in the AD-AS model The following graph shows an economy that is currently producing at point A (grey star symbol), which corresponds to the intersection of the AD, and SRAS, curves LRAS SRAS1 170 165 No Intervention SRAS 2 160 155 If Fed Intervenes 150 145 - AD 140 AD 135 130 10 11 12 13 14 1516 17 REAL GDP (Trillions of dollars) According to the graph, the potential output of this economy is Since real GDP is currently $11 trillion (as shown by point A), this level of potential output means there is currently of Along SRASi, wages would have been negotiated based on an expected price level of means that real wages are labor market conditions would cause nominal wages to .Since the actual price level at point A is 145, this had been negotiated, which will unemployment. If the Fed does not intervene, these , shifting the curve to the . Eventually, the economy

Explanation / Answer

1) 13 trillion dollar.

2)Shortage

3) output

4)150

5) increased

6) decrease

7) fall

8) SRAS curve

9) increase

10) increase

11) AD

12) right

13) unemployment

14) inflation

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