Draw the graphs requested for positive feedback

Consider the standard aggregate supply and demand model that is in long run

equilibrium.

a. (5 pts.) There is an increase in input prices economy-wide. Draw this shock on

the AD/AS model in the short run.

b. (2 pts.) What effect does this shock have on unemployment and the price level? c. (3 pts.) If the Federal Reserve wanted to use monetary policy to correct the price

level, how would they achieve this using open market operations? (Hint: would the Fed buy or sell bonds?)

d. (5 pts.) Use a graph to show the effect of the policy you described in (c) on the

money market. What is the resulting effect on the interest rate?

e. (4 pts.) On a new graph, continuing from your graph in (a), show the effect of the

policy you described in (c) on the AD/AS model. Explain the reasoning for any shift(s) that you draw.

f. (1 pts.) What is the effect on unemployment as a result of the policy you describe

in (c)?

g. (5 pts.) Explain how the Federal Reserve would have used open market

operations if they had wished to correct the unemployment problem instead of the price level problem. Your explanation should involve the money market. How would this policy have impacted the price level? (You do not have to draw a graph, just provide a clear explanation)