The hypothetical information in the following table shows what the values for real GDP and the price level will be in 2017 if the Fed does not use monetary policy. Year Potential GDP Real GDP Price level 2016 $17.7 trillion $17.7 trillion 114
2017 18.1 trillion 17.9 trillion 116
a. If the Fed wants to keep real GDP at its potential level in 2017, should it use an expansionary policy or a contractionary policy? Briefly explain your answer.
b. Suppose the Fed's policy is successful in keeping real GDP at its potential level in 2017. State whether each of the following will be higher of lower than if the Fed had taken no action. I. Real GDP II. Potential GDP III The inflation rate IV. The Unemployment rate
c. Draw an AD and AS graph to illustrate your answer. Be sure your graph contains LRAS, SRAS, and AD curves for 2016 and 2017, with and without monetary policy action.