Table 26-2
$$\begin{array} { | l | l | l | c | }
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2016 & \$ 18.0 \text { trillion } & \$ 18.0 \text { trillion } & 150 \
\hline 2017 & 18.5 \text { trillion } & 18.2 \text { trillion } & 152 \
\hline
\end{array}$$
-Refer to Table 26-2.Consider the hypothetical information in the table above for potential real GDP,real GDP,and the price level in 2016 and in 2017 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 2017,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
 $$\begin{array} { | l | l | l | c | } 
\hline \text { Year } & \text { Potential Real GDP } & \text { Real GDP } & \text { Price Level } \
\hline 2016 & \$ 18.0 \text { trillion } & \$ 18.0 \text { trillion } & 150 \
\hline 2017 & 18.5 \text { trillion } & 18.2 \text { trillion } & 152 \
\hline
\end{array}$$
-Refer to Table 26-2.Consider the hypothetical information in the table above for potential real GDP,real GDP,and the price level in 2016 and in 2017 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 2017,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 2017, real GDP would be higher than if the Fed had taken no action. However, this would lead to an increase in aggregate demand, which could cause an increase in the inflation rate. Therefore, real GDP and the inflation rate would be higher than if the Fed had taken no action. Option A is incorrect because the unemployment rate is not mentioned in the question or the table. Option C is incorrect because potential GDP will remain the same regardless of Fed action. Option D is incorrect because if the Fed successfully uses monetary policy to keep real GDP at its potential level, it would likely lead to a decrease in the inflation rate, not an increase.

Table 26-2 -Refer to Table 26-2