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Consider the economy represented by the dynamic aggregate supply-aggregate demand graph below, which is initially at a short-run and long-run equilibrium at point A in year 1
Consider the economy represented by the dynamic aggregate supply-aggregate demand graph below, which is initially at a short-run and long-run equilibrium at point A in year 1. The economy is at a short-run equilibrium in year 2 at point B. How could monetary policy be used to improve the economy in year 2? LRAS LRAS. Price level (GDP delator 2009-100) SRAS, SRAS pu AD AD GDP GDP. GDP Real GDP (willions of 2009 dollars) Contractionary monetary policy could be used to increase real GDP to potential GDP Expansionary monetary policy could be used to increase employment. Contractionary monetary policy could be used to lower unemployment. Expansionary monetary policy could be used to decrease the rate of price inflation.
Expert Solution
Expansionary Monetary Policy could be used to increase employment.
Expansionary Monetary Policy means the government will buy bonds from the market which will create a money supply in the economy, which will lead to a decrease in the rate of interest offered by banks for the loans. When the rate of interest is low, companies will borrow more money and will expand their businesses which will create employment opportunities for the people, which will ultimately improve the economy.
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