Suppose that the Fed has a policy of increasing the money supply when it observes that the
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Suppose that the Fed has a policy of increasing the money supply when it observes that the economy is in recession. However, suppose that about six months are needed for an increase in the money supply to affect aggregate demand, which is about the same amount of time needed for firms to review and reset their prices. What effects will the Fed's policy have on output and price stability? Does your answer change if
(a) the Fed has some ability to forecast recessions
(b) price adjustment takes longer than six months?
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