Use the graph in the next column to answer the following questions.

a. If the Fed does not take any policy action, what will be the level of real GDP and the price level in 2021?

b. If the Fed wants to keep real GDP at its potential level in 2021, should it use an expansionary policy or a contractionary policy? Should the trading desk be buying Treasury bills or selling them?

c. If the Fed takes no policy action, what will be the inflation rate in 2021? If the Fed uses monetary policy to keep real GDP at its potential level, what will be the inflation rate in 2021?

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Price level (GDP deflator, 2009 = 100) 124 LRAS 2021 LRAS 2020 SRAS 2020 SRAS 2021 AD 2021 122 120 0 L $18.0 (without policy) AD2021 (with policy) AD2020 18.4 18.5 Real GDP (trillions of 2009 dollars)