3 Traditional Monetary And Fiscal Policy The As Ad View Consider An Economy Describe 1537431

3. Traditional monetary and fiscal policy—the AS–AD view Consider an economy described by Figure 9-10, with out-

put lower than the natural level of output and the nominal interest rate at zero.

a. Draw Figure 9-10 and explain why the ADcurve has a ver- tical portion.

b. If the Federal Reserve increases the money supply, what will happen to the AS–ADdiagram you drew in part (a)? Will equilibrium output move closer to the natural level?

c. Given your answers to part (b), what policy options are available to the government to try to increase output? Consider traditional policy options only, and not financial policies. How does your answer relate to the policy deci- sions of the Obama administration and the U.S. Congress in February 2009?

 

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