The hypothetical information in the following table shows what the situation will be in 2023 if the Fed does not use monetary policy.

a. If the Fed wants to keep real GDP at its potential level in 2023, should it use an expansionary policy or a contractionary policy? Will the Fed raise its target for the federal fund rate or lower it?

b. If the Fed’s policy is successful in keeping real GDP at its potential level in 2023, state whether each of the following will be higher, lower, or the same as it would have been if the Fed had taken no action.

i. Real GDP 

ii. Potential GDP 

iii. The inflation rate 

iv. The unemployment rate

c. Draw an aggregate demand and aggregate supply graph to illustrate the effects of the Fed’s policy. Be sure that your graph contains LRAS curves for 2022 and 2023; SRAS curves for 2022 and 2023; AD curves for 2022 and 2023, with and without monetary policy action; and equilibrium real GDP and the price level in 2023, with and without policy.

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Year 2022 2023 Potential GDP $20.1 trillion 20.5 trillion Real GDP $20.1 trillion 20.4 trillion Price Level 120.0 122.0