Consider the scenario in which the Fed is implementing a contractionary monetary policy aimed at alleviating inflationary pressures.In this regard please provide an answer to the questions listed below. In order to answer, it might be a good idea to use a money market diagram and show how interest rates affect the economy using the AD/AS diagram. No need to submit the graphs, but once again drawing the two graphs (money market and AD/AS) for yourself will go a long way in guiding you towards the right answer. Note. In the static AD/AS model, initially assume that the economy is in SR equilibrium and real GDP is above potential GDP.
a) As a result of the contractionary monetary policy pursued by the Fed, what would happen with the interest rate?
The interest rate is going to (rise/fall/stay fixed) .
b) What would happen with the short run aggregate supply curve?
Short run aggregate supply curve will shift (left/right/stay fixed) .
c) What would happen with the long run aggregate supply curve?
Long run aggregate supply curve will shift (left/right/stay fixed) .
d) What would happen with the aggregate demand curve?
Aggregate demand curve will shift (left/right/stay fixed) .
e) What would happen with the Real GDP level?
Real GDP will (rise/fall/stay fixed) .
f) What would happen with the employment level?
Unmployment level will (rise/fall/stay fixed).