The Fed is concerned that the economy might be entering a recession.
a. Which one of the three types of unemployment (frictional, structural, cyclical) is the Fed trying to improve when it conducts monetary policy? Briefly explain why.

b. Identify an appropriate monetary policy response to address a slowing economy. What would the Fed change, and in what direction would that policy tool change?

c. Did you identify a hawkish or dovish monetary policy in part b of this question?

d. Explain how this change monetary policy would affect the economy. Specifically, how would consumers and firms respond to this policy and how does this change in behavior connect to the economy and real GDP?

e. Graphically depict the impact of the monetary policy you chose in part b on the economy using the model of Aggregate Demand and Supply. Which curve shifts, and in which direction, based on your answer in part b? Depict this change in the graph below.

 

AS price level AD real GDP