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Use the Phillips Curve and AS/AD to explain the following using the appropriate graphs. a) Imagine the Fed was more closely controlled by the...
Use the Phillips Curve and AS/AD to explain the following using the appropriate graphs.
a) Imagine the Fed was more closely controlled by the President. She is running for reelection and knows that what people care about is unemployment, which she knows will decrease if short run output increases. Show the effect on a Phillips Curve.
b) Instead, imagine the Fed is as it is today. Janet Yellen suggests to the President that the motion won't get carried through the FOMC. Instead the President gets Congress to pass through a stimulus bill, increasing government spending on quick projects. Show this effect on an IS/MP graph.
c) What will the Fed do in this case?
d) Show the above situation on an AS-AD graph and explain what returns output back to its equilibrium point. Again, only short answers are acceptable.
e) It's the 1970s and oil prices are rising. The Fed sees GDP growth fall but this time correctly diagnoses the problem. What action should the Fed take in this circumstance? Show the effect of both the oil price shock and the Fed's actions on a Phillips Curve.
