Assume that price level in the Bob Islands, a U.S. trading partner, increases signaling inflation in the Bob 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 US dollar