Question

Assume an economy operating below full employment.

1. Draw a correctly labeled AD/AS graph showing:
   1. the problem in the economy
   2. current price level and output
   3. full employment output
2. Identify an open market operation that the Fed could implement to resolve the problem.
3. Using a correctly labeled money market graph with a side-by-side investment demand graph, show the effect of the policy you identified in part B on each of the following:
   1. nominal interest rates
   2. quantity of investment demanded
4. On your graph in part A, show the short-run effects of the action you identified on each of the following:
   1. aggregate demand - explain why AD shifts
   2. output
   3. price level
5. Given your answer in part C, explain what will happen to each of the following:
   1. the international value of the dollar
   2. the nation's exports and imports

Answer 1