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1. Suppose that the Federal Reserve is worried about inflation. Explain the likely way that the Fed would respond to this concern.
a. Describe the tool(s) it would use to counter this concern. Be sure to offer detail to your description.
b. Explain the effect/direction (in the short run) their policy decision would have on
i. interest rates
ii. aggregate demand
iii. output
iv. unemployment
v. investment
vi. exchange rates
vii. international financial capital flows
c. Draw the 1) AD/AS, 2) loanable funds, and 3) exchange rate models to support your answers
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