Consider the AS-AD model and assume that the economy is initially in an above full employment...

 

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Consider the AS-AD model and assume that the economy is initially in an above full employment equilibrium. If parts (a) and (b) do not contain graphs, you will get a score of zero for this question. (10 points) a. Suppose that inflation is currently higher than the Fed's inflation target. How should the Fed respond? Draw what happens in your AS-AD model and tell me how the price level and rGDP change. b. Suppose that you have the same scenario that was in part (a). What would happen to the price level and rGDP if the Fed decided not to do anything? On a separate graph, draw what would happen in your AS-AD model in the long run. Consider the AS-AD model and assume that the economy is initially in an above full employment equilibrium. If parts (a) and (b) do not contain graphs, you will get a score of zero for this question. (10 points) a. Suppose that inflation is currently higher than the Fed's inflation target. How should the Fed respond? Draw what happens in your AS-AD model and tell me how the price level and rGDP change. b. Suppose that you have the same scenario that was in part (a). What would happen to the price level and rGDP if the Fed decided not to do anything? On a separate graph, draw what would happen in your AS-AD model in the long run.

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In the ASAD model addressing the scenarios youve described involves understanding the role of monetary policy and natural adjustments in the economy L... View the full answer