a) In a graph with prices in the vertical axis and quantity of money in the horizontal axis and under the assumption of flexible prices, show how central banks can use public speeches that influence inflation expectations to conduct monetary policy when the economy is in a liquidity trap. b) Draw the aggregate demand function in a graph with real interest rates in the vertical axis and output in the horizontal axis. Then draw a graph depicting the Phillips curve. Use this framework to show how the FED can use public speeches that influence inflation expectations to lower inflation.

Answer Both

Question 6 (20 points): Answer one of the following questions about inflation expectations. a) In a graph with prices in the vertical axis and quantity of money in the horizontal axis and under the assumption of flexible prices, show how central banks can use public speeches that influence inflation expectations to conduct monetary policy when the economy is in a liquidity trap. b) Draw the aggregate demand function in a graph with real interest rates in the vertical axis and output in the horizontal axis. Then draw a graph depicting the Phillips curve. Use this framework to show how the FED can use public speeches that influence inflation expectations to lower inflation