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The economy is currently in a recession with high unemployment and low output. The Federal Reserve...

The economy is currently in a recession with high unemployment and low output.

The Federal Reserve could conduct expansionary monetary policy to restore the economy to its natural rate of output. Draw and upload a graph of the Aggregate Demand and Aggregate Supply model to illustrate the impact of the expansionary monetary policy in returning the economy to the natural level of output. Be sure to carefully label all components of your graph.

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Answer #1

Since, there is a recession which means actual output is below natural level of output or potential output. So, central bank will increase the money supply. This raises the aggregate demand and it shift to rightward. This causes output to rise and becomes equal to potential level or natural level of output.

The increase in money supply will cause the interest rate to decline. People will hold more money in hand and less in bonds. As interest rate falls, investment spending rises. Consumers will also spend more because lending is cheaper now. So, aggregate demand rises.

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