In 2008, the Federal Reserve faced a decrease in aggregate demand caused by the housing and financial crisis and a decrease in short-run aggregate supply caused by rising commodity prices, particularly an increase in oil prices.
a. Suppose the Fed responds quickly to these shocks and adjusts monetary policy to keep unemployment and output at their natural rates. What action would it take?
b. Given the situation posed with the rising oil prices, why might the Fed choose not to pursue the course of action described in part (a)?