Directions:

Read the following excerpts. Identify whether the policy action is fiscal or monetary and expansionary or contractionary. Draw and label the change that would occur on the ADAS graph as a result of the policy action described in each. Identify what will happen as a result of the policy to the price level, employment, and real GDP.

1. Excerpt from FOMC Statement Released November 16, 1999

"The Federal Open Market Committee today voted to raise its target for the federal funds rate by 25 basis points to 5-1/2 percent. In a related action, the Board of Governors approved a 25 basis point increase in the discount rate to 5 percent.

1. Although cost pressures appear generally contained, risks to sustainable growth persist. Despite tentative evidence of a slowing in certain interest-sensitive sectors of the economy and of accelerating productivity, the expansion of activity continues in excess of the economy's growth potential. As a consequence, the pool of available workers willing to take jobs has been drawn down further in recent months, a trend that must eventually be contained if inflationary imbalances are to remain in check and economic expansion continue."

\fLRAS Price Level SRAS PL1 AD Real GDP Y1 YLRAS Price Level SRAS PL1 AD Y1 Real GDP Y\fLRAS Price Level SRAS PL1 AD Real GDP Y Y1