Use a graph to show the effects of an expansionary monetary ...

[dollx]

Use a graph to show the effects of an expansionary monetary policy moving an economy out of recession and to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level.
 
  What will be an ideal response?

Question 2

The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because
 
  A) the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy.
  B) changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time.
  C) the Federal Reserve can immediately recognize when real GDP is below or above potential GDP.
  D) changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes.

[micaelaswann]

Answer to Question 1

If the economy is in recession, it is currently at point A, below potential real GDP. An expansionary monetary policy will shift the aggregate demand curve to the right from AD1 to AD2, increasing real GDP and the price level until it reaches potential real GDP at point B.

Answer to Question 2

A