The Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices.
Required:
a. Starting from a long-run equilibrium, illustrate the effects of these two changes using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram.
b. Suppose the Fed responds quickly to these shocks and adjusts monetary policy to keep unemployment and output at their natural rate. What action would it take?
c. Why might the Fed choose not to purse the course of action described in part (b)?
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The Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial...
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