The hypothetical information in the following table shows what the situation will be in 2019 if the Fed does not use monetary policy.

a. If the Fed wants to keep real GDP at its potential level in 2019, should it use an expansionary policy or a contractionary policy? Should the trading desk be buying T-bills or selling them?
b. If the Fed's policy is successful in keeping real GDP at its potential level in 2019, state whether each of the following will be higher, lower, or the same as it would have been if the Fed had taken no action:
i. Real GDP
ii. Potential GDP
iii. The inflation rate
iv. The unemployment rate
c. Draw an aggregate demand and aggregate supply graph to illustrate the effects of the Fed's policy. Be sure that your graph contains LRAS curves for 2018 and 2019; SRAS curves for 2018 and 2019; AD curves for 2018 and 2019, with and without monetary policy action; and equilibrium real GDP and the price level in 2019, with and without policy.

Transcribed Image Text:

Potential GDP $17.9 trillion Price Level Year Real GDP 2018 $17.9 trillion 110.0 18.3 trillion 18.2 trillion 112.0 2019