Answer Happy

1. Suppose the US economy is experiencing inflation higher than desired but has relatively high output and low unemployment. What monetary policy actions may the Fed take to reduce inflation? (HINT: There are three tools the FED's have to use). 2. Using the aggregate demand and aggregate supply framework, what happens to inflation/price level and output when the Federal Reserve uses contractionary monetary policy? Explain and show graphically (AD-AS model). 3. If the Fed is successful in reducing inflation, what will the likely impact be on the unemployment rate in the US? Explain fully. 4. In the 1970s the US experienced a significant period of “stagflation," when both inflation and unemployment were high. Using the aggregate demand and aggregate supply framework, explain why monetary policy can be ineffective at solving both the problems of high unemployment and high inflation when the two occur together. A. You should have an explanation and graph (AD-AS model) of an expansionary monetary policy. What happens to inflation and unemployment? B. You should have an explanation and graph (AD-AS model) of a contractionary monetary policy. What happens to inflation and unemployment? C. After completing the above, explain the predicament the FED is in when faced with stagflation.