Economy: (16T,14T,12T,11T,10T) Currently (inflationary/recessionary gap) of (4t,

Question

Economy: (16T,14T,12T,11T,10T)

Currently (inflationary/recessionary gap) of (4t,2t,5t,1t,3t)

fed will (increase/decrease) the money supply, which will (increase/decrease) the interest rate, incentive to (increase/decrease) investment, shifting the (SRAS,AD,LRAS) curve to the (left/right)

high (inflation/unemployment), high (inflation/unemployment)

PLEASE DO GRAPH AS WELL

Consider the following graph. The economy is currently producing at point A (grey star symbol), which corresponds to the intersection of the AD, and SRASs. The Federal Reserve ("the Fed) is considering whether to intervene in an effort to bring the economy back to its potential. LRAS SRAS 165 160 No Intervention SRAS2 155 150 If Fed Intervenes 145 140 AD2 135 AD 130 125 10 11 12 13 4 15 16 17 18 REAL GDP (Trilons of dollars) According to the graph, the potential output of this economy is Since real GOP is currently $12 trillion (as shown by point A), this level of potential output means there is currently of On the previous graph, place the tan point (dash symbol) at the new long-run equilibrium output and price level if the Fed does not intervene. Assume there are no feedback effects on the curve that does not shift.) Now suppose the Fed chooses to intervene in an effort to move the economy more quickly back to its potential output. To do so, the Fed will investment, shifting the money supply, which will curve to the the interest rate, thereby giving firms an incentive to the Y On the previous graph, place the black point (plus symbol) at the new long-run equilibrium output and price level if the Fed intervenes in this way and successfully brings the economy back to long-run equilibrium. (Again, assume there are no feedback effects on the curve that does not shift.) Compare your answers from the previous few questions. If the Fed does not intervene, the economy will likely have relatively high , on the other hand, if the Fed does intervene, it risks causing relatively high , if it changes the money supply too much.

Explanation / Answer

Economy is 14T

Currently recessionary gap of 2t

fed will increase the money supply, which will decrease the interest rate

incentive to increase investment

shifting the AD curve to the right

high unemployment, high inflation.

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