Table 26-2

-Refer to Table 26-2. 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?
A) real GDP and the unemployment rate
B) real GDP and the inflation rate
C) real GDP and potential GDP
D) potential GDP and the inflation rate

Question

Table 26-2
 
-Refer to Table 26-2. 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?
A) real GDP and the unemployment rate 
B) real GDP and the inflation rate 
C) real GDP and potential GDP 
D) potential GDP and the inflation rate

Quizplus · Accepted Answer

If the Federal Reserve uses monetary policy successfully to keep real GDP at its potential level in 2015, real GDP will be higher than if the Fed had taken no action. However, without monetary policy, the price level may increase due to the excess demand for goods and services. As a result, the inflation rate would be higher. Therefore, the only choice that makes sense is B, where real GDP and the inflation rate are both higher than if the Fed had taken no action.

Table 26-2 -Refer to Table 26-2. Consider the Hypothetical Information in the Hypothetical