Table 17-8 -Refer to Table 17-8

Table 17-8
$$\begin{array} { | c | c | c | c | } \hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \\\hline 2013 & \$ 13.5 \text { trillion } & \$ 13.5 \text { trillion } & 142 \\\hline 2014 & 14.0 \text { trillion } & 14.4 \text { trillion } & 150 \\\hline\end{array}$$
-Refer to Table 17-8.The hypothetical information in the table shows what the values for real GDP and the price level will be in 2014 if the Federal Reserve does not use monetary policy:
a.If the Fed wants to keep real GDP at its potential level in 2014,should it use an expansionary policy or a contractionary policy? Should the trading desk buy T-bills or sell them?
b.Suppose the Fed's policy is successful in keeping real GDP at its potential level in 2014.State whether each of the following will be higher or lower than if the Fed had taken no action:
(i) Real GDP
(ii) Full-employment real GDP
(iii) The inflation rate
(iv) The unemployment rate
c.Draw an aggregate demand and aggregate supply graph to illustrate your answer.Be sure that your graph contains LRAS curves for 2013 and 2014; SRAS curves 2013 and 2014; AD curve for 2013 and 2014,with and without monetary policy actions; and equilibrium real GDP and the price level in 2014 with and without policy.

Correct Answer:

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a. The Fed should use contractionary mon...

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