Author Question: Potential GDP is estimated to grow at a rate of 3.2 in the United States. Actual GDP in the U.S. ... (Read 68 times)

karen · **on:** Jun 29, 2018

Potential GDP is estimated to grow at a rate of 3.2 in the United States. Actual GDP in the U.S.

A) always grows at a slower rate than potential GDP.
B) is the same as potential GDP if all firms in the economy were working at capacity.
C) always grows at the same rate as potential GDP.
D) always grows at a faster rate than potential GDP.

Question 2

Can the Federal Reserve achieve both low inflation and low levels of unemployment? Explain.

What will be an ideal response?

amynguyen1221 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

B

Answer to Question 2

To reduce inflation, the Federal Reserve must reduce the money supply, which results in higher interest rates. When interest rates increase, consumption and firm investment fall, resulting in a decrease in aggregate demand and, as the short-run Phillips curve shows, an increase in the level of unemployment in the short run. This result indicates that the Fed cannot simultaneously reduce inflation and unemployment. However, if people immediately revise their inflation expectations once the Fed announces a change in monetary policy, the announcement on contraction in the money supply will move the economy down its long-run Phillips curve to a lower rate of inflation with no change in the unemployment rate. In that case, it would be possible to reduce inflation with no increase in unemployment.