Question
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 a change in monetary policy would impact demand (be sure to include in your discussion which variables in the demand equation will be impacted, explaining the direction of the impact and why) and how the change in demand will impact output, employment, and inflation. Please note stating demand/output decreases or increases is not a sufficient answer and will earn zero points.
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