As described in the chapter, the FederalReserve in 2008 faced a decrease in
Chapter 22, Problem 9(choose chapter or problem)
As described in the chapter, the FederalReserve in 2008 faced a decrease in aggregatedemand caused by the housing and financialcrises and a decrease in short-run aggregatesupply caused by rising commodity prices.a. Starting from a long-run equilibrium, illustratethe effects of these two changes usingboth an aggregate-supply/aggregate-demanddiagram and a Phillips-curve diagram. Onboth diagrams, label the initial long-run equilibriumas point A and the resulting short-runequilibrium as point B. For each of the followingvariables, state whether it rises or falls,or whether the impact is ambiguous: output,unemployment, the price level, the inflationrate.b. Suppose the Fed responds quickly to theseshocks and adjusts monetary policy to keepunemployment and output at their naturalrates. What action would it take? On thesame set of graphs from part (a), show theresults. Label the new equilibrium as point C.c. Why might the Fed choose not to pursue thecourse of action described in part (b)?
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