Table 26-3

-Refer to Table 26-3.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2014 and in 2015 if the Federal Reserve does not use monetary policy.If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015,which of the following will be higher than if the Fed had taken no action?

Question

Table 26-3
 
-Refer to Table 26-3.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2014 and in 2015 if the Federal Reserve does not use monetary policy.If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015,which of the following will be higher than if the Fed had taken no action?

Quizplus · Accepted Answer

If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015, then real GDP will be higher than if no action was taken. However, if no action is taken, there will be downward pressure on prices due to the economy operating below its potential level. This can lead to deflation. Therefore, if the Fed takes action to keep real GDP at its potential level, it will prevent deflation and lead to a higher inflation rate than if no action was taken. Thus, real GDP and the inflation rate will be higher than if the Fed had taken no action.

Table 26-3 -Refer to Table 26-3.Consider the Hypothetical Information in the Table