SOLVED

11) Expansionary monetary policy enacted during a recession will cause the inflation rate to increase. 12) In reality, the Fed is unable to use monetary policy to keep real GDP exactly at its potential level. 13) Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and short-run aggregate supply such that the condition of the economy will induce the Federal Reserve to conduct an expansionary monetary policy. Briefly explain the condition of the economy and what the Federal Reserve is attempting to do.     14) Refer to Table 17-2. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2011 if the Federal Reserve does not use monetary policy: a.If the Fed wants to keep real GDP at its potential level in 2011, 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 2011. State whether each of the following will be higher or lower than if the Fed had taken no action: c.Draw an aggregate demand and aggregate supply graph to illustrate your answer. Be sure that your graph contains LRAS curves for 2010 and 2011; SRAS curves 2010 and 2011; AD curve for 2010 and 2011, with and without monetary policy actions; and equilibrium real GDP and the price level in 2011 with and without policy. a.The Fed should use contractionary monetary policy. The trading desk needs to sell T-bills. b.If the Fed’s contractionary policy is successful, real GDP in 2011 will be lower as will the inflation rate. Full-employment real GDP will not change and the unemployment rate will rise. c.The economy starts out in equilibrium in 2010 at point A. In 2011, with no contractionary monetary policy, the economy will go to point B with real GDP above potential real GDP and the price level at 150. Contractionary monetary policy will slow down the growth of aggregate demand and the economy will reach equilibrium at point C. 15) Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and short-run aggregate supply such that the condition of the economy will induce the Federal Reserve to conduct a contractionary monetary policy. Briefly explain the condition of the economy and what the Federal Reserve is attempting to do. 16) Would the Federal Reserve respond more aggressively with interest rate cuts in a recession caused by a decrease in spending, as in the 2001 recession, than in a recession caused by an increase in oil prices, as in the 1974-75 recession?Â