Chapter 35, Problem 2CYU

To determine

What the figure would have looked like if the Fed had been following a monetarist policy since 1996?

Explanation of Solution

The classical model of price indicates that the economy is flowing freely and prices can be adjusted according to the ups and downs in the economy such as in good economic conditions, prices will go up.

And, if Fed had followed a monetarist policy from 1996, then the line would be in a constant slope rather than in an upward or downward shape because according to this policy, interest rates are used to adjust the supply of money in the economy and this policy will be achieved when the target growth rate of the money supply met with actual money supply in the economy. Therefore, if the graph followed this policy from the beginning, then there would be no up and down in the money supply of the economy and it remains stable from year to year.

Economics Concept Introduction

Introduction: An aggregate supply refers to the total supply of goods and services at different price levels (aggregated) in the economy. In simple words, it is the total quantity that is produced and sold by firms at different prices in the market.

The price level is the average current price of goods and services in the economy that are produced in a particular interval.