Suppose the Economy Is in a Boom in Which Real

question 148

Essay

Suppose the economy is in a boom in which real GDP is greater than potential GDP.The rate of inflation,however,remains at the target level set by the Fed.Suppose that financial markets are convinced that higher inflation is imminent and,in agreement,the Fed decides to increase interest rates.
(A)Illustrate the change in Fed policy with a monetary policy rule diagram.
(B)Show,using the aggregate demand curve and an inflation adjustment line,the short-run,medium-run,and long-run effect of the Fed's policy.

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