You learned that there are 3 important macroeconomic goals: economic growth, low
unemployment, and low inflation. Monetary policy is one of the tools economies
have to help achieve these goals. It affects interest rates and the available loanable
funds in an economy, which in turn affects several components of aggregate
demand.
After being hit hard by the Covid-19 pandemic in 2020, real GDP increased 5.7
percent in 2021, in contrast to a decrease of 3.4 percent in 2020. In 2022, real GDP
decreased in the first 2 quarters, but has slightly increased in the third quarter.
Moreover, the U.S. unemployment rate in 2022 has been around 4%, whereas the
inflation rate measured by the CPI has passed 8%. (source: Bureau of Economic
Analysis and Bureau of Labor Statistics).
As inflation emerged as a topic economic challenge in 2022, what was the course of
action that the Fed took in order to deal with this issue? Answer all the items below:
a. What type of monetary policy was applied? Expansionary or Contractionary?
Justify your answer.
b. Conditioned on your answer in (a), explain how the Fed can use its tools (open
market operation, reserve requirement, and discount rate) to apply its policy.
c. Draw the money market graph and illustrate the effect of these tools in the S x
D of money.
d. Illustrate the impact observed in the economy (on price level and real GDP) by
drawing the AD/AS diagram learned in class.
PS: in \"c\" and \"d\", you must draw the graphs in order to get the points.
