Question

1. Using the Greenspan approach to monetary policy, answer the following. Present a graphical and intuitive explanations for (a) and (b). a) Suppose Greenspan incorrectly forecasts the LRAS and SRAS to be further out that actually occurred and that AD is insufficient to reach long-run equilibrium. What are the implications for the price level and the cyclical component of output for Greenspan’s policy? (15 points) b) Suppose Greenspan correctly forecasts the future position of the LRAS but forecasts the SRAS to be further in than actually occurred. Assume that the predicated position of the AD curve was too far out relative to the predictions of the LRAS and SRAS. What are the implications for the price level and the cyclical component of output for Greenspan’s policy?

Answer 1