1)The Fed has several tools they can use to exercise their monetary policies. Describe two ways the Fed can do to exercise a tight money policy! Describe the kind of economic situation in which such a tight money policy would be appropriate for the economy! Explain why!

2)Suppose, due to the rising expectations of the economy, housing price appreciates rapidly. American Households perceive this as a massive increase in their wealth and thus react accordingly. Describe the short-run impact of these events on the US economy! Suppose, being the chairperson of the Fed, you see the above events have caused the inflation rate to start rising rapidly, signaling that the economy may be overheating. In light of this situation, what type of monetary policy would you introduce? Describe, in the same chart, the expected impact of your policy on the US economy! Assume all shocks are unanticipated, and other things are constant.

Market of All Goods and Services, US Price index LRAS SRAS P1 ADJ Roal GOPMarket of All Goods and Services, US Price LRAS index SRAS, P1 AD1 Roal GOP Y YF