Between 1979 and 1981, the Federal Reserve sharply increased its target for the Federal Funds interest rate. This move was followed by an increase in the unemployment rate.
a. To achieve an increase in the interest rate target, would the Federal Reserve increase or decrease the nominal money supply?
b. Using the AD-AS model, show graphically how the change in the money supply described in part (a) would affect prices and output over the short- and longrun. What would happen to real interest rates in the long run?
c. Are your findings in part (b) consistent with what actually occurred in the early 1980s?