Question 5 (2.5 points) ) Listen In the figure below, the economy is currently at point E3. Which fiscal policy recommendation will help return the economy to the long-run equilibrium? Price Level LRAS SRAS 131 125 E2 118 AD1 AD2 AD3 Real GDP $8 .2 $9 .6 $10 .8 in trillions Increase the money supply Increase personal income taxes Decrease interest rates Increase government spending Question 6 (20 points) 1) Listen The Federal Reserve has a dual mandate of full employment and price stability. Oftentimes this mandate is challenging as there is a short term tradeoff between unemployment and inflation. From 2008 to 2015, however, inflation was consistently below the target rate while unemployment was well above its natural level. Should the Fed have pursued more aggressive monetary policy to raise inflation and lower unemployment? Choose one from below and state which school of economics your answer is subscribing. Then, explain your answer using what we have learned in this class. A. No. Inflation is always bad because it lowers the incentive to invest and we know that investment that increases productivity is the only way to raise living standards in the long run. B. No. The Fed exhausted its normal tools and the appropriate policy response then is large scale fiscal stimulus. There is only so much the Fed can do. C. Yes. The Fed could have done more and raising inflation to 3 or 4 percent would have eased the recovery without long term damage to the economy. D. No. The Fed should not over-stimulate the economy by raising inflation and lower unemployment as the current economic situation is quite stable. Rather the Fed should raise the interest rate so that when there is another recession, the Fed has an effective tool to use