Assume an economy operating below full employment.

A. Draw a correctly labeled AD/AS graph showing:

• the problem in the economy
• current price level and output
• full employment output

B. Identify an open market operation that the Fed could implement to resolve the problem.

C. Using a correctly labeled money market graph with a side-by-side investment demand graph, show the effect of the policy you identified in part B on each of the following:

• nominal interest rates
• quantity of investment demanded

D. On your graph in part A, show the short-run effects of the action you identified on each of the following:

• aggregate demand - explain why AD shifts
• output
• price level

E. Given your answer in part C, explain what will happen to each of the following:

• the international value of the dollar
• the nation's exports and imports