Q. Answer the following question using the Keynesian Model of a closed economy. Suppose the Federal government would like to increase output in the short-run and will engage in expansionary fiscal policy. The President contacts you, the Chair of the Federal Reserve, and asks you to take action to keep interest rates close to where they currently are.
a) What action do you take? Illustrate and explain the movements of the IS and LM curves.
b) Illustrate and explain the movement of the aggregate demand and aggregate supply curve both in the short and long run. What potential long term effect should you warn the President about?