1.Draw the SRAS, AD, and LRAS curves for an economy with a recessionary gap.

a)What monetary policy should the Fed pursue with its open market operations? Briefly explain your answer.

b)Show the effect of the monetary policy on the original graph.

2.Suppose the Fed sells $25 million in U.S. Treasury bills. Suppose also that the required minimum reserve ratio is 4% and the public holds a fixed amount of currency (so all new loans turn into an equal amount of checkable deposits in the banking system).

a)Show the immediate changes to the T-accounts for the Federal Reeve and for commercial banks from the sale of T-bills.

b)Show the T-account for the commercial banks (one account for all the banks together), after all changes from the sale have registered.

3.You're on the Federal Open Market Committee!

a)The economic data indicate that inflationary pressures are growing due to an inflationary gap. What policy would you recommend regarding the target federal funds rate?

b)How in practice can the Fed achieve the change in the target federal funds rate you recommended in answering part a - what instruments are available to them?

c)Illustrate your response to part a) with a n AS/AD graph showing the impact of the policy you recommended to prevent inflation. Describe the anticipated effect of your policy on interest rates, aggregate demand, and the short-run macroeconomic equilibrium.