Traditional monetary and fiscal policy-the AS-AD view Consider an economy described by Figure 9-10, with output lower than the natural level of output and the nominal interest rate at zero.
a. Draw Figure 9-10 and explain why the AD curve has a vertical portion.
b. If the Federal Reserve increases the money supply, what will happen to the AS-AD diagram you drew in part (a)? Will equilibrium output move closer to the natural level?
c. Given your answers to part (b), what policy options are available to the government to try to increase output? Consider traditional policy options only, and not financial policies. How does your answer relate to the policy decisions of the Obama administration and the U.S. Congress in February 2009?
