Suppose the economy is at point 1 in Figure 13.1. With output ...

[rosent76]

Suppose the economy is at point 1 in Figure 13.1. With output below potential output, it might not be possible to create any expectation of an increase in inflation.
 
  How, then, might output be brought back to potential? What would this look like on the graph?

Question 2

Which of the following has served most recently as Chairman of the Board of Governors of the Federal Reserve System?
 
  A) Nancy Pelosi
  B) Alan Greenspan
  C) Ben Bernanke
  D) Paul Volcker

[ErinKing]

Answer to Question 1

The reason output is so low is that the real interest rate at which the goods market is in equilibrium is negative. If expected inflation were high enough, the real interest rate could be low enough. An alternative to raising expected inflation is to persuade businesses and consumers to increase spending at every level of the real interest rate  that is, shift the IS curve to the right. An increase in autonomous spending, and/or a decrease in financial frictions both shifts AD to the right, and removes the kink, restoring the usual negative relationship between output and inflation. Nonconventional monetary policy can provide such a positive demand shock, increasing both output and the long-run equilibrium real interest rate. On the graph, the new aggregate demand curve might intersect the LRAS curve at an inflation rate somewhat lower than .

Answer to Question 2

C

[rosent76]

Excellent

[ryansturges]

TYSM