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Suppose an imaginary economy is experiencing very low unemployment rates (lower than the natural rate of unemployment for the economy), excessive levels of aggregate demand,
Suppose an imaginary economy is experiencing very low unemployment rates (lower than the natural rate of unemployment for the economy), excessive levels of aggregate demand, and sustained rates of inflation above the central banks target level.
Explain how the FOMC is able to adjust the target on the federal funds rate in this problem. I am not asking for the tool they will use, I am asking how the tool they use will ultimately impact the target on the federal funds rate.
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