The effect of an increase in inflation as shown in the ADAS model at initial full employment.The effect of an increase in inflation, as shown in the ADAS model at below full employment and expalin how the Fed will handle the inflationary expectations and what how shifts the AD curve.
Suppose that there is an "inflation scare," that is, suppose market participants increase their expectations of future inflation.
a) Next, explain the effects of an increase in the expected rate of inflation on the equilibrium values of the nominal interest rate and the real interest rate if:
(1) The U.S. economy is initially at full employment.
(2) The U.S. economy is initially below full employment.
b) Suppose that the Fed wanted to offset the results found in your answer to a. Explain what it would do