The economy is at full employment

Reference no: EM13830605

Assume that the economy is at full employment, interest rate is 4%, and money supply is $1,000. Suppose economy is experiencing a sudden rise in crude oil prices. A. Use the AS/AD model to show the impact of this event on equilibrium GDP and equilibrium prices in the economy. B. The Fed is committed to combating the threat of potential inflation. Will the Fed use restrictive (tight) or expansionary (easy) monetary policy? Suggest a monetary policy tool that the Fed can use to achieve this goal. Use a money market diagram to show the impact of this policy on equilibrium interest rates and money stock. C. If the Fed uses the tool as you suggested in part B, what will be the impact on equilibrium price level and real output? Use the AS/AD diagram of part A to illustrate your answer.

Reference no: EM13830605

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