Suppose that you are appointed to chair the Federal Reserve. Your twin goals are to maintain low inflation and to stabilize economic activity - that is, to keep output at potential. How and why you would change the nominal interest rate in response to the three shocks described in (a), (b), and (c)? Show the effects on the economy in the short run using the IS-MP diagram and briefly explain the adjustment mechanism. Assume that in all cases the output is at the potential level before the shock. Consider each event individually, independent from the others.

1. 

A rapid rise in the stock markets that increases people's wealth Real interest rate, R Short-Run Output, Y