Table 26-3
$$\begin{array} { | l | l | l | c | }
\hline \text { Year } & \text { Potential Real GDP } & { \text { Real GDP } } & \text { Price Level } \
\hline 2016 & \$ 18.0 \text { trillion } & \$ 18.0 \text { trillion } & 150 \
\hline 2017 & 18.5 \text { trillion } & 18.8 \text { trillion } & 154 \
\hline
\end{array}$$
-Refer to Table 26-3.Consider the hypothetical information in the table above for potential real GDP,real GDP,and the price level in 2016 and in 2017 if the Federal Reserve does not use monetary policy.If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2017,which of the following will be lower than if the Fed had taken no action?
A)real GDP and the unemployment rate
B)real GDP and the inflation rate
C)real GDP and potential GDP
D)potential GDP and the inflation rate

Question

Table 26-3
 $$\begin{array} { | l | l | l | c | } 
\hline \text { Year } & \text { Potential Real GDP } & { \text { Real GDP } } & \text { Price Level } \
\hline 2016 & \$ 18.0 \text { trillion } & \$ 18.0 \text { trillion } & 150 \
\hline 2017 & 18.5 \text { trillion } & 18.8 \text { trillion } & 154 \
\hline
\end{array}$$
-Refer to Table 26-3.Consider the hypothetical information in the table above for potential real GDP,real GDP,and the price level in 2016 and in 2017 if the Federal Reserve does not use monetary policy.If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2017,which of the following will be lower than if the Fed had taken no action?
A)real GDP and the unemployment rate
B)real GDP and the inflation rate
C)real GDP and potential GDP
D)potential GDP and the inflation rate

Quizplus · Accepted Answer

If the Fed takes no action, real GDP will fall below potential GDP resulting in a recession and high unemployment. In this scenario, the inflation rate will be low due to weak aggregate demand. However, if the Fed uses monetary policy to keep real GDP at its potential level, it is likely that the inflation rate will increase slightly, but real GDP will be higher than if the Fed had taken no action. Therefore, the only option that will be lower than if the Fed had taken no action is real GDP and the inflation rate (Option B).

Table 26-3 -Refer to Table 26-3