Suppose that in Freezone, shown in problem 11, the short-run aggregate supply curve is SASB and potential GDP increases to $350 billion. a. What happens if the central bank lowers the overnight rate...

Suppose that in Freezone, shown in problem 11, the short-run aggregate supply curve is SASB and potential GDP increases to $350 billion.

a. What happens if the central bank lowers the overnight rate and buys securities on the open market?

b. What happens if the central bank raises the overnight rate and sells securities on the open market?

c. Do you recommend that the central bank lower or raise the overnight rate? Why?

problem 11

The figure shows the economy of Freezone. The aggregate demand curve is AD and the short-run aggregate supply curve is
 Potential GDP is
300 billion.

a. What are the price level and real GDP?

b. Does Freezone have an unemployment problem or an inflation problem? Why?

c. What do you predict will happen in Freezone if the central bank takes no monetary policy actions?

d. What monetary policy action would you advise the central bank to take and what do you predict will be the effect of that action?