Author Question: If the Fed set and achieved a goal of zero unemployment, A) the inflation rate would increase. ... (Read 39 times)

captainjonesify · **on:** Jun 30, 2018

If the Fed set and achieved a goal of zero unemployment,

A) the inflation rate would increase.
B) real GDP would equal potential GDP.
C) they would have an easier time achieving the goal of price stability.
D) the natural rate of unemployment would be negative.

Question 2

On the graphs above, show how the central bank implements a decrease in the inflation target. In words, explain why the change in the real interest rate is temporary.

What will be an ideal response?

at · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

A

Answer to Question 2

The graphs resemble Fig. 13.10 with all shifts reversed. The increase in the real interest rate causes a decrease in expenditures (AD shifts down). Declining inflation lowers the real interest rate (movement along the MP curve), which increases expenditures (movement along the AD curve). Since there has been no shift of the IS curve, the real interest rate must return to its original value, so that aggregate demand is equal to potential output.