Section 17 (A-E)

Elrond, Chairman of the Council, is a monetarist and believes that prices and wages are flexible so that the economy is self-regulating. But unlike Denethor, he feels that money is the key to the economy.

The face of Elrond was ageless,

neither old nor young, though in it was written the memory of many things both glad and sorrowful. His hair was dark as the shadows of twilight, and upon it was set a circlet of silver; his eyes were grey as a clear evening, and in them was a light like the light of stars. Venerable he seemed as a king crowned with many winters, and yet hale as a

tried warrior in the fulness of his strength. -

a) What are the 3 monetary policy objectives and goals of the Federal Council of Elrond (Fed)? What tradeoff does the council face for its goals? Explain.

B) Graph the implementation of expansionary monetary policy on the economy of Middle Earth when there is a recessionary gap (in both money market and AD/AS model). What happens to the price level, unemployment and real GDP? Specify 3 different actions the Council (Fed) could do to accomplish this policy.

C) Graph the implementation of contractionary monetary policy on the economy of Middle Earth when there is an inflationary gap (in both money market and AD/AS model). What happens to the price level, unemployment and real GDP? Specify 3 different actions the Council (Fed) could do to accomplish this policy.

D) Draw the effect on the federal funds rate if the Council (Fed) performs an open market purchase. Graphs the ripple effects of this action. Be sure to include the end result in each market and how those results affect the components of aggregate demand.

E) Draw the effect on the federal funds rate if the Council (Fed) performs an open market sale. Graphs the ripple effects of this action. Be sure to include the end result in each market and how those results affect the components of aggregate demand.