The hypothetical information in the following table shows what the economic situation will be in 2015 if the Fed does not use monetary policy:
Year
Potential GDP
Real GDP
Price Level
2014
$15.2 trillion
$15.2 trillion
110.0
2015
$15.6 trillion
$15.8 trillion
115.5
a. If the Fed wants to keep real GDP at its potential level in 2015, should it use expansionary policy or contractionary policy? Should its trading desk be buying T-bills or selling them?
b. If the Fed's policy is successful in keeping real GDP at its potential level in 2015, state whether each of following will be higher, lower, or the same as it would have been if the Fed had taken no action: (i) real GDP; (ii) potential real GDP; (iii) the inflation rate; (iv) the unemployment rate.