Question

the follöwing iormation under the assumption that the government y policy Year 2015 2016 Price 112.0 114.4 Real GDP $15.0 tn $16.0 tn Potential GDP $15.0 tn $15.2 tn If the Fed wants GDP to be at its potential in 2016, would it do and expansio contractionary policy? What could this contractionary/expansionary policy b a) Draw a diagram showing 2016 both with and without policy b) Assume the Fed is successful, for each of Real GD e, determine if they will be higher or lower in 2016, relative t the rate of inflation to change, relative to the one implied P, Potential GDP and the une o 2015? Would by the numbers in th

Answer 1

a) here the fed will use a contractionary fiscal policy as you are at an output level which is higher than you desire, so here the government will try and reduce the expenditure or the central bank will reduce the money supply.

here you should have been on Yf but you are LM' at Y, above the potential LM that you wanted LM E1 IS IS 0 Yf 0 Yf without policy intervention When govt intervenes LM shifts to LM' Money supply reduced by fed to reduce output