The regular sloping aggregate supply and demand graph in FIGURE 2 shows the economy is currently in short-run equilibrium, as shown by the intersection of the Aggregate Demand and Aggregate Supply curve. Say, full employment is given at 6 trillion dollars, which is shown by the vertical line that says Long-Run Aggregate Supply. How would you propose the government steer the economy to get to full employment equilibrium using monetary policy? In other words, in what specific way should the Federal Reserve Bank use the discount rate, the reserve requirement and open market operations?

The regular sloping aggregate supply and demand graph in FIGURE 2 shows the economy is currently in short-run equilibrium, as shown by the intersection of the Aggregate Demand and Aggregate Supply curve. Say, full employment is given at 6 trillion dollars, which is shown by the vertical line that says Long-Run Aggregate Supply. Say you have advised the government on a policy to take the economy to full employment. What would be the costs and benefits of this policy? In other words, what would happen to our basic macro-indicators, GDP (Y), Inflation (P) and Unemployment (U)?

The regular sloping aggregate supply and demand graph in FIGURE 2 shows the economy is currently in short-run equilibrium, as shown by the intersection of the Aggregate Demand and Aggregate Supply curve. Say, full employment is given at 6 trillion dollars, which is shown by the vertical line that says Long-Run Aggregate Supply. If the change in GDP (from less than full employment equilibrium to full employment GDP) is $ 2 trillion (?Y = 2), and the mpc = 0.75, how would you use fiscal policy to fix the unemployment problem? In other words, show how much would government expenditures (?G) need to change by? Is this an example of expansionary or contractionary fiscal policy?

FIGURE 2 PRICE LEVEL 250 Long-Run Aggregate Supply 200 Short-Run Aggregate Supply 150 100 50 Aggregate Demand 0 2 6 8 10 QUANTITY OF OUTPUT (Trillions of dollars]