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1:25 Done a docs.google.com AA C In year 2 the Fed compares the inflation rate in year 1 to the target of 4%. If the inflation rate in year 1 is higher or lower than the target rate, the Fed adjusts the interest rate to bring the inflation rate back to the target value. What will the Fed do? Assume the IS and PC curves remain as in the previous year. Update the diagram and label the new equilibrium as point C. Which of the following statements below is correct? O The Fed will buy government bonds. O The Fed will cut the income tax. The Fed will lower its inflation target. The Fed will sell government bonds. PAGE 3. Draw the diagram corresponding to the questions in this section. Make sure you label A