Suppose you have just been appointed an economic adviser to the President. The current rate of unemployment is at 10%. Inflation is at an extremely low level of 1.5%. Firms are operating at only 60% of their capacity. The natural rate of unemployment is assumed to be at 3.5%.
a. What type of gap is your economy facing? (Please graph it using either the expenditures approach or the AD-AS approach.)
b. What type of fiscal policy would you suggest in this case? Name a coordinated monetary policy that the Federal Reserve could use to complement the fiscal policy you suggested.
c. Do you have a preference in this case for either monetary vs. fiscal policy? Why or why not?
d. Describe the effectiveness of the policies in their respective abilities to fight the type of gap you graphed above.
Answer will be sent by email as attachment.
