A monetary policy action that could eliminate an inflationary gap in the short run is an open market sale of government securitiesī. ![]() ![]() Because when there is an inflationary gap in the short run, then in the long run a new equilibrium will arise as input prices and expectations adjust upward, causing the aggregate supply to shift upward and to the left and pushing equilibrium real GDP back to its long-run potential value. The supply curve of bonds is drawn vertically because If there is an inflationary gap in the short run, the Federal Reserve can eliminate the gap in the short run by undertaking a policy action that reduces aggregate demand. But, if Federal Reserve chooses not to close the gap in the short run, the economy will eventually get back to full employment in the long run. The Fed changes its policy and the interest rate changes to 9 percent. A perpetual bond sells for $1,000 and will pay $81 a year forever. Your purchases are made with money holdings represented by The transaction demand for money because you planned to buy the gift and the precautionary demand for money because you did not anticipate buying the sweater. You pay cash for the gift and write a check for the sweater. ![]() TERMS IN THIS SET (17) Suppose you go shopping for a gift for a friend and also find a sweater that you want for yourself.
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