Question: Suppose that in Freezone, shown in problem 1, the short-run aggregate supply curve is SASA and a drought decreases potential GDP to $250 billion. a.

Suppose that in Freezone, shown in problem 1, the short-run aggregate supply curve is SASA and a drought decreases potential GDP to $250 billion.
a. What happens in Freezone if the central bank lowers the federal funds rate and buys securities on the open market?
b. What happens in Freezone if the central bank raises the federal funds rate and sells securities on the open market?
c. Do you recommend that the central bank lower or raise the federal funds rate? Why?

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