The effect of Federal Reserve action The following graph shows an economy that i

Question

The effect of Federal Reserve action

The following graph shows an economy that is currently producing at point A (grey star symbol), which corresponds to intersection of the AD_1 and SRAS_1curves According to the graph, the potential output of this economy is dollar 9t/dollar 1 It/dollar 15t/dollar 13t/dollar 10t Since real GDP is currently dollar 15 trillion (as shown by point A), this level of potential output means there is currently anexpansionary gap a contractionary gap of dollar 4t/dollar 5t/dollar 3t/dollar 2t/dollar 1t Along SRAS_1, wages would have been negotiated based on an expected price level of 140 145 135Since the actual price level at point A is 140, this means that real wages are same/lower/higher had been negotiated, which will increase decrease unemployment. If the Fed does not intervene, these labor market conditions would cause nominal wages to increase decrease, shifting the LARS SARS AD curve to the left right Eventually, the economy would reach a new long-run equilibrium. On the previous graph, use the tan point (dash symbol) to indicate the 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 increase decrease the money supply, which will increase decrease the interest rate, thereby giving firms an incentive to investment, shifting the LARS SARS AD curve to the left right 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.) unemployment Compare your answers from the previous few questions. If the Fed does not intervene, the economy will likely have relatively high inflation. On the other hand, if the Fed does intervene, it risks causing relatively high unemployment inflation,if it changes the money supply too much.

Explanation / Answer

SOLUTION : please fill in the blanks as in order given below.

1.) 13t   

2.) an expansionary gap of 2t.

3.)145

4.) Lower

5.) increase,

6.)increase

7.) SRAS

8.) Left.

9.)increase

10.) decrease

11.)increase

12.) SRAS

13.) Left

14.)inflation

15.)unempolyment .

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