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. (2 points) What type of monetary policy-- tight or easy-- might the Fed use? b. (5 points) 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:

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

c. (3 points) Name & describe the three (traditional) tools of monetary policy.