Consumer confidence in the economy falls, and as a result, ...

[tsand2]

Consumer confidence in the economy falls, and as a result, aggregate demand decreases. As real GDP falls below potential GDP, if the Fed followed Friedman's k-percent rule, the Fed would
 
  A) increase the quantity of money more than usual.
  B) continue allowing the quantity of money to grow at k percent.
  C) increase government expenditures.
  D) lower the federal funds rate.
  E) raise the federal funds rate.

Question 2

Discuss the relationship between the aggregate supply curve and the short-run Phillips curve.
 
  What will be an ideal response?

[sarahccccc]

Answer to Question 1

B

Answer to Question 2

The short-run Phillips curve and the aggregate supply curve arise because the money wage rate does not change in the short run. When the price level increases, the inflation rate is positive. And when the price level increases, the money wage rate does not change, so the real wage rate declines. As a result of the lower real wage rate, the quantity of labor employed increases so that the quantity of real GDP increases and the unemployment rate decreases. Therefore the higher price level is associated with an increase in real GDP and a higher inflation rate is associated with a decrease in unemployment.

[tsand2]

Gracias!

[samiel-sayed]

Thanks for the timely response, appreciate it