The Federal Reserve and Central Banking Effects of Monetary Policy in the Economy (Inflation) LRAS SRAS PRICE LEVEL AD REAL GDP 2. Suppose that initially the economy is at the intersection of AD and SPAS as seen in the graph above. a. What monetary policy can the Fed implement to move the economy to full-employment? b. If the Fed is going to use open market operations, what should it do? c. In the short run, what is the effect on nominal interest rates? Explain. d. What effect will the change in interest rates have on bond prices. e. In the short run, what happens to real output? Shift the curve on the graph to show how the Fed's action results in a change in real output and explain why the shift occurs. f. In the short run, what happens to the price level? Explain how the Fed's action results in a change to the price level. Assume the central bank (FED) decides to use expansionary monetary policy to reach the level of employment represented by the output level Y1 on the graph below. Monetary Policy in the Long Run LRAS SRAS PRICE LEVEL AD REAL GDP