1. Business
  2. Economics
  3. the following graph shows the aggregate demand ad and aggregate...

Question: the following graph shows the aggregate demand ad and aggregate...

Question details

2. Monetary and fiscal policy mix The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves for a hypothetical economy, where potential output is $600 million. Suppose the Fed implements an expansionary monetary policy. Show the effects of this policy by shifting the aggregate demand curve, the aggregate supply curve, or both. 1200 AS 1000 800 AS AS 600 400 200 200 400 600 800 1000 1200 REAL GDP Suppose the government seeks to restore the potential GDP level of $600 million by implementing a contractionary fiscal policy, such as increasing taxes. Note: Do not illustrate the effect of this fiscal policy change on the preceding graph.) The changes in monetary and fiscal policy cause interest rates to rise which lowers investment. The expected result of this policy mix is less capital formation and slower growth of potential GDP

Solution by an expert tutor
Blurred Solution
This question has been solved
Subscribe to see this solution