If wages and prices adjust slowly, we would expect expansionary ...

[ereecah]

If wages and prices adjust slowly, we would expect expansionary monetary policy to be
 
  A) more likely to result in a vertical short-run Phillips curve.
  B) less likely to reduce the natural unemployment rate.
  C) more likely to reduce inflation.
  D) more likely to affect the unemployment rate.

Question 2

Refer to Table 26-5. Suppose the table above illustrates the values of real and potential GDP and the price level if the Fed does not vote to change their current policy to be more contractionary or expansionary.
 
  Suppose that the Fed uses an appropriate policy and is successful in keeping real GDP at potential in 2017. State whether each of the following will be higher or lower than if the Fed had taken no action:
  a. Real GDP
  b. Potential real GDP
  c. The price level
  d. The unemployment rate

[rosiehomeworddo]

Answer to Question 1

D

Answer to Question 2

If the Fed's policy was successful, real GDP in 2017 will rise from 18.5 trillion to the level of potential GDP in 2017 which is 18.7 trillion. Potential GDP is not influenced by monetary policy so it should stay at 18.7 trillion. Since expansionary monetary policy increases AD, the short-run equilibrium will move up the short-run aggregate supply curve and the price level will be higher. Finally, because the level of real GDP is higher with policy, the unemployment rate will be lower than it would have been without the change in policy.

[ereecah]

TYSM

[flexer1n1]

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