Assume that price level in the ABC Islands, a U.S. trading partner, increases signaling inflation in the ABC Island economy.

1. Using aggregate demand aggregate supply analysis, explain the impact of the increased price level on the United States economy.
2. If the Federal Reserve wants to repair the effects on the U.S. economy noted above, identify a policy action it might undertake.
3. Explain the impact of the Fed action on each of the following:

• output
• price level
• the international value of the U.S. dollar