Question 2: The Macroeconomic Policy Response to the Pandemic

YEAR	POTENTIAL GDP	REAL GDP	PRICE LEVEL
2020	$1500 billion	$1500 billion	100
2021	$1590 billion	$1560 billion	105

Refer to the table above to answer the questions below:

a) Explain whether a contractionary or an expansionary fiscal or monetary policy should be implemented in 2021. ( 2 marks)

b) Based on you answer to part a) above, identity one monetary and fiscal policy instrument. ( 1 + 1 = 2 marks)

c) If the economy is successful in keeping real GDP at its potential level in 2021, state whether each ofthe following will be higher, lower, or the same if this economy had taken no action. ( 4 marks)

i Real GDP ii Potential GDP iii The inflation rate iv The unemployment rate

d) Now let us suppose that real GDP in 2021 was higher than the potential GDP in 2021. What wouldyour answer to part a) and part b) be under this scenario? ( 2 + 2 marks = 4 marks)