Question

Suppose that declining resource supplies reduce potential output in

each period by 4%. What kind of monetary policy would be needed to

maintain a zero rate of inflation at full employment?

Answer 1

Contractionary monetary policy would be needed since economy demand decrease due to an increase in interest rates, thus their is availability of zero rate of inflation through regulation of money supply. Expansionary policy can further be implemented to achieve full employment. The business sector is stimulated due to increase in money supply thus leading to an increase of job opportunities.