section 17

a) What are the monetary policy objectives and goals of the Federal Council of Elrond (Fed)? What tradeoff does the council face for its goals? Explain.

b) Graph the implementation of expansionary monetary policy on the economy of Middle Earth when there is a recessionary gap (in both money market and AD/AS model). What happens to the price level, unemployment and real GDP? Specify 3 different actions the Council (Fed) could do to accomplish this policy.

c) Graph the implementation of contractionary monetary policy on the economy of Middle Earth when there is an inflationary gap (in both money market and AD/AS model). What happens to the price level, unemployment and real GDP? Specify 3 different actions the Council (Fed) could do to accomplish this policy.

d) Draw the effect on the federal funds rate if the Council (Fed) performs an open market purchase. Graphs the ripple effects of this action. Be sure to include the end result in each market and how those results affect the components of aggregate demand.

e) Draw the effect on the federal funds rate if the Council (Fed) performs an open market sale. Graphs the ripple effects of this action. Be sure to include the end result in each market and how those results affect the components of aggregate demand.