Assume that the economy is initially in an above full employment equilibrium.

A. Suppose that inflation is currently higher than the Fed's inflation target. How should the Fed respond? Draw what happens in AS-AD model and explain how the price level and rGDP change.

B. Suppose the same scenario that was in part (a). What would happen to the price level and rGDP if the Fed decided not to do anything? In a separate graph, draw what would happen in AS-AD model in the long-run.

C. Why does the Fed usually respond like you suggested in part (a) rather than letting the economy work in part (b)?