Figure 12.4

Scenario: The above figures represent the economy of Mondolvia, where points A, B, C, and D in the first figure reflect the corresponding points in the second figure. The economy of Mondolvia is initially at equilibrium with real GDP equal to potential GDP. In April 2012, Mondolvia reached the peak of a rapid housing bubble that dramatically increased consumer wealth. The central bank of Mondolvia recognized this housing bubble peak existed in June, 2012 and implemented corrective policy in August 2012. The corrective policy actually changed output in the economy 12 months after it was implemented. In the meantime, the housing bubble burst in December 2012, returning the economy back to its initial, pre-bubble equilibrium level.
-Refer to Figure 12.4.As a result of the monetary policy taking effect after the housing bubble had already burst,real GDP will be ________ potential GDP and the rate of inflation will be ________ the rate of inflation when the economy was initially in equilibrium.

Question

Figure 12.4

Scenario: The above figures represent the economy of Mondolvia, where points A, B, C, and D in the first figure reflect the corresponding points in the second figure. The economy of Mondolvia is initially at equilibrium with real GDP equal to potential GDP. In April 2012, Mondolvia reached the peak of a rapid housing bubble that dramatically increased consumer wealth. The central bank of Mondolvia recognized this housing bubble peak existed in June, 2012 and implemented corrective policy in August 2012. The corrective policy actually changed output in the economy 12 months after it was implemented. In the meantime, the housing bubble burst in December 2012, returning the economy back to its initial, pre-bubble equilibrium level.
-Refer to Figure 12.4.As a result of the monetary policy taking effect after the housing bubble had already burst,real GDP will be ________ potential GDP and the rate of inflation will be ________ the rate of inflation when the economy was initially in equilibrium.

Quizplus · Accepted Answer

As the economy had already returned back to its initial equilibrium level, the real GDP will be less than the potential GDP as there is no output gap. Also, the corrective policy was implemented after the housing bubble had already burst, so the rate of inflation will be less than the rate of inflation when the economy was initially in equilibrium. Therefore, option C is the correct choice.

Figure 12.4 Scenario: the Above Figures Represent the Economy of Mondolvia, Where