Exhibit 16.4

-Refer to Exhibit 16.4. If the Fed follows the announced stable-price policy of keeping prices at P' and keeping the economy at its potential, the Fed must stimulate aggregate demand as much as workers and firms expect (shown by point_____), but this is _____.
A) c, inflationary
B) d, inflationary
C) e, inflationary
D) c, deflationary
E) d, deflationary

Question

Exhibit 16.4
 
-Refer to Exhibit 16.4. If the Fed follows the announced stable-price policy of keeping prices at P' and keeping the economy at its potential, the Fed must stimulate aggregate demand as much as workers and firms expect (shown by point_____), but this is _____.
A) c, inflationary 
B) d, inflationary 
C) e, inflationary 
D) c, deflationary 
E) d, deflationary

Quizplus · Accepted Answer

If the Fed follows the announced stable-price policy of keeping prices at P' and keeping the economy at its potential, the Fed must stimulate aggregate demand as much as workers and firms expect (shown by point e). However, this would be inflationary as the economy would be operating above its potential output level. Option A, B, D, and E are incorrect as they suggest deflationary outcomes, which are not aligned with the stable-price policy.

Exhibit 16.4 -Refer to Exhibit 16.4. If the Fed Follows the Announced