The economy of a hypothetical country, Treeland, has been stable for two or three years with very low unemployment. Wages have been gradually increasing during this time. Now an aggressive policy of increasing tariffs on foreign goods imported into the country results in retaliatory tariffs from other countries on Treeland's products and services. This causes great loss of business in Treeland and results in a significant portion of workers losing their jobs.

Given this scenario, insert your answers below each of the following questions.

a. What kind of economic gap will start to occur in Treeland (inflationary or recessionary)?

b. Which of these graphs, Figure 1 or Figure 2, depicts this economic gap in Treeland? Explain why you chose this graph.

Figure 1

Figure 1: Graph of the economy showing demand shifted to the right.

Figure 2

Figure 2: Graph of the economy showing demand shifted to the left.

c. What part of Treeland's Federal Reserve's congressional mandate does this scenario trigger (price stability or maximum sustainable employment)?

d. List the four monetary policy tools the Federal Reserve of Treeland has available to use in this scenario

e. Explain in detail how the Federal Reserve would use each of these tools and the resulting impact on the economy.