Chapter 16, Problem 22P

To determine

The monetary policy initiatives to affect a reduction or an increase in the Real GDP in the economy

Concept introduction:

Expansionary and Contractionary Policy of Fed- the Fed has two policy options at its disposal at all points of time-expansionary and contractionary. While the expansionary has the impact of increasing the money in circulation augmenting the aggregate demand from the four sectors in the economy, the contractionary policy has the reverse impact through a reduction in the money supply. The monetary tools of the Fed are Open Market operations, interest rates and CRR/SLR.

Real GDP- GDP adjusted for inflation/deflation is the Real GDP of the country. It is also called the “constant price”, “inflation corrected” or “constant dollar GDP”. It is the significant economic measure indicating the economic growth and purchasing power in the economy. Algebraically it is expressed as:

Where Yr=Real GDP, Y=GDP and D=adjustment factor

In the Aggregate Supply, Aggregate Demand and Equilibrium analysis, the trade off is established between the price level along the y-axis and the Real GDP along the x-axis.