Answer to Question #98414 in Macroeconomics for Tiffany

Question

2. The U.S. Federal Reserve is the central bank of the United States. It has many roles in the economy, but one of the key roles is conducting monetary policy.
c. Using the monetary policy tool the Fed employs most often, the Fed closes an inflationary gap. Describe the steps the economy goes through to move to the new equilibrium output and price level. Use graphs with your answer and be sure to label everything completely.

Answer 1

Inflationary gap is the difference between an actuallevel of GDP in a national economy and anticipated GDP, when a national economy is at full employment. Traditionally,an actual level of GDP is lower than the so-called 'natural' one. That is why a government is interested in stimulation of GDP via instruments of monetary policy, in particular. A government usually implies instruments of stimulating monetary policy, for example, lowering the interest rates. It makes money cheaper in a national economy. Commercial businesses take credits from banks. As a result,the output increases and the inflationary gap is closed. Usually, it is reached at a higher level of prices.