1. Suppose we observe that US economy is experiencing low unemployment (3%), faster-than-average real GDP growth (4%), and increasing inflation (rising from 2% to 4%).

a. Draw the AS/AD graph for the kind of shock that would generate these symptoms, and give an example of how that kind of shock might happen. What kind of change in the economy leads to this kind of AS/AD graph?

 b. Briefly discuss what you see in the graph that corresponds to each of the symptoms. E.g. what part of the picture
tells you we have low unemployment?

c) Describe the two goals that the Federal Reserve is required to pursue with monetary policy. Given these two goals, what specific actions will the Fed take in reaction to the shock, and how will these affect real GDP in the short run? Be sure to explain how the proposed action helps achieve the Fed\'s goals.

Answer rating: 100% (QA)

The attempt is as follow Explanation a The positive AD shocks can cause low unemployment higher real GDP and also higher price level inflation As you ... View the full answer