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