If the LRAS curve shifts, does the AS curve also have to shift? If the AS curve shifts, does the LRAS curve also have to shift? (Hint: Consider the factors that shift each curve and determine whether these factors also shift the other curve.)The Federal Reserve can use expansionary/contractionary policy to shift the AD curve. Use the AD–AS framework to show how monetary policy should be used to return output to potential GDP when: (i) the aggregate demand curve intersects the short-run aggregate supply curve to the left of potential GDP; and (ii) the aggregate demand curve intersects the short-run aggregate supply curve to the right of potential GDP.Given that the economy can correct itself and return to potential GDP, why would the Fed pursue contractionary monetary policy following a negative aggregate supply (inflation) shock? How could the Fed pursuing a contractionary monetary policy be preferable to the economy correcting itself? Is it possible that a contractionary monetary policy could hurt the economy, given the lags in the impact of monetary policy actions? Explain.

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Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter14: Modern Macroeconomics And Monetary Policy

Section: Chapter Questions

Problem 10CQ

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If the LRAS curve shifts, does the AS curve also have to shift? If the AS curve shifts, does the LRAS curve also have to shift? (Hint: Consider the factors that shift each curve and determine whether these factors also shift the other curve.)
The Federal Reserve can use expansionary/contractionary policy to shift the AD curve. Use the AD–AS framework to show how monetary policy should be used to return output to potential GDP when: (i) the aggregate demand curve intersects the short-run aggregate supply curve to the left of potential GDP; and (ii) the aggregate demand curve intersects the short-run aggregate supply curve to the right of potential GDP.
Given that the economy can correct itself and return to potential GDP, why would the Fed pursue contractionary monetary policy following a negative aggregate supply (inflation) shock? How could the Fed pursuing a contractionary monetary policy be preferable to the economy correcting itself? Is it possible that a contractionary monetary policy could hurt the economy, given the lags in the impact of monetary policy actions? Explain.

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