Suppose Inflationary Pressures Are Building Up in an Economy

question 36

Essay

Suppose inflationary pressures are building up in an economy. Is this economy likely to
Jexperience a recessionary gap or an inflationary gap? Explain how the Fed could use monetary policy to combat inflation. A complete answer must include an explanation of the policy tools that can be used and their effects on the money supply, interest rates, and aggregate demand. Use a diagram of LRAS, SRAS, and AD to illustrate your answer.

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Definitions:

Serial Position Effect

A cognitive phenomenon where items at the beginning and end of a list are more likely to be remembered than those in the middle.

Effortful Processing

The active process of trying to remember, learn, or understand something, which requires attention and deliberate effort.

Effective Encoding

The process of converting information into a form that allows it to be stored in our memory.

Amygdala

A key structure within the brain associated with processing emotions, including fear and pleasure.