Consider the economic data for Country A:
Unemployment level of 15%
Natural Rate of Unemployment is 6%.
Required Reserves is 25%
C = 50 + 0.75Y; I = 600; G = 250
(note: T = 200 for purpose of this assignment assume Y = Yd)
Equilibrium GDP = Y = C + I + G
The full employment level of Real GDP is 4,000.
MS = 425
MD = 400 – 500r + 0.75Y
Using the Business Cycle Diagram, show this economy. Label:
The current year as Year A
Full employment level of Real GDP
The current level of Real GDP
The recessionary or inflationary gap
Natural Rate of Unemployment
Use Aggregate Demand and Aggregate Supply to show this economy.
Suggest and show the results of a Fiscal Policy action that will bring this economy to full employment level of Real GDP. Explain the effect on the fiscal budget and show the effect on the Money Market and the Investment Market.
Suggest, and show, a Monetary Policy action that would restore the original equilibrium level of interest. Also show the result of this Monetary Policy action on the Investment Market and the Goods and Services (AS/AD) Market.