aved Table 1 Potential Real GDP Real GDP rice Level 150 152 ear 013 14.0 14.5 tr

Question

aved Table 1 Potential Real GDP Real GDP rice Level 150 152 ear 013 14.0 14.5 trillion 14.2 trillion Refer to Table 1. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy. If the Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2014, which of the following will be higher than if the Congress and the president had taken no action? 12 1) real GDP and the unemployment rate 15 ?2) real GDP and the inflation rate 18 3) real GDP and potential GDP 4) potential GDP and the inflation rate n 2 Saved

Explanation / Answer

Real gdp and inflation rate

In 2014 real gdp is less than potential gdp. Therefore congress undertake expansionary fiscal policy which increases aggregate demand. Increase in demand leads to increase in real gdp and price level.

Thus real gdp and inflation rate increase with congress and president's action.

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