Using a Money Market Diagram and a Diagram of Aggregate

question 6

Essay

Using a money market diagram and a diagram of aggregate demand and aggregate supply, explain how the Fed can eliminate an inflationary gap. Be sure to include in your answer a discussion of what happens to the money supply, interest rates, and the components of aggregate demand.

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Definitions:

Consideration

A value promised in exchange for a certain act in a contractual agreement.

Quantum Meruit

A legal principle where a party is compensated with a reasonable sum for goods or services provided, even if no contract exists.

Quantum Valebant

A principle in contract law that allows for the recovery of as much as deserved, or the reasonable value of goods or services rendered when no contract price was established.

Commission

A fee paid to an agent or employee for conducting a transaction or performing a service.