3. The long-run effects of monetary policy

The following graphs show the state of an economy that is currently in long-run equilibrium. The first graph shows the aggregate demand (AD) and long-run aggregate supply (LRAS) curves. The second shows the long-run and short-run Phillips curves (LRPC and SRPC).

AD

LRAS

0

3

6

9

12

15

18

PRICE LEVEL

OUTPUT (Trillions of dollars)

AD

1

AD

2

LRAS

SRPC

LRPC

0

2

4

6

8

10

12

INFLATION RATE

UNEMPLOYMENT RATE (Percent)

SRPC

1

SRPC

2

LRPC

Which of the following statements are true based on these graphs?Check all that apply.

The natural level of output is $9 trillion.

The unemployment rate is currently 6% higher than the natural rate of unemployment.

The current quantity of output is greater than potential output.

Suppose the central bank of the economyincreasesthe money supply.

Show the long-run effects of this policy onbothof the graphs by shifting the appropriate curves.

The long-run effect of the central bank's policy is in the inflation rate, in the unemployment rate, and in real GDP.