Assume the time has come that the economy appears to be stabilizing and appears to be entering a period of sustained expansion. As a result, the Fed has become concerned that the huge amount of excess reserves in the commercial banking system could potentially prove to be inflationary.

a. What type of monetary policy-- tight or easy-- might the Fed use?

b. In our model of the economy, we used the money market, investment demand (curve) & AS/AD diagrams to illustrate an example of the conducting of monetary policy. Briefly describe the conducting of the type of monetary policy the Fed would conduct based on your above answer: *Fill in Blanks*

In the money market, the Fed would BLANK, the money supply; this will BLANK, interest rates which will BLANK, the quantity of investment demanded. This would cause the BLANK curve to BLANK which would BLANK equilibrium output prices & real GDP.

c. Name & describe the three (traditional) tools of monetary policy.