Describe the appropriate monetary policy

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Suppose the economy had been operating at its potential level of real GDP in the past, but a sudden increase in wealth causes consumer spending to suddenly and substantially increase. The increase is expected to last for a significant period of time. Use the AD/AS model to analyze.

(a) How would these changes be represented graphically (i.e.; which curve shifts and in which direction)?

(b) What short-run impact would the event have on the economy's [i] price level, [ii] level of real GDP, and [iii] unemployment rate [i.e. increase, decrease, no effect, indeterminate]?

(c) Describe the appropriate monetary policy that could be used to correct the situation outlined at the start of the question.

(d) How would the monetary policies you have described impact the economy (i.e.; which curve shifts and in which direction)?

(e) When compared to the economy's position prior to the use of such policies, what specific impact would the monetary policy have on the economy's [i] price level, [ii] level of real GDP, and [iii] unemployment rate [i.e. would there be an increase, decrease, no effect, or is the outcome indeterminate]?

Reference no: EM132608423


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