Suppose the economy is initially in long-run equilibrium

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(a) Suppose the economy is initially in long-run equilibrium and the U.S. stock market has a prolonged decrease in shareholder value. Use the AD–AS model to predict short-run changes to real GDP and the aggregate price level. Using the AD–AS model explain how the economy will adjust in the long run. Should the government undertake any proactive fiscal or monetary policy in this situation? Explain your reasoning

(b) Suppose the annual inflation rate is at 2% and 8.5% of the labor force is currently unemployed. If you were on the Fed's Open Market Committee, what action would you prescribe? How would this affect the economy, the inflation rate, and the unemployment rate?

(c) Suppose that the inflation rate is currently 4%. The level of potential real GDP is estimated at $4 trillion and the level of current real GDP is estimated at $3.75 trillion. Use the Taylor rule to estimate the target Federal funds rate.

Reference no: EM13697392

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