The U.S. inflation climbed to 8.5% in March, the highest in four decades. On the other hand, the unemployment rate fell to a two-year low of 3.6%. In the press conference following the meeting of the Federal Open Market Committee (FOMC) in February, the Federal Reserve (i.e. the U.S. central bank) chairman Jerome Powell commented on the US economy, "The American economy is very strong and well positioned to handle tighter monetary policy, ... I saw a committee that is acutely aware of the need to returnthe economy to price stability." In fact, the Federal Reserve raised interest rates by a quarter percentage point and signalled hikes at all six remaining meetings this year, launching a campaign to take steam out of an overheated economy1.

1- List two ways or instruments that the Fed may use to tighten monetary policy.

2- Based on the comments from the Fed chairman Jerome Powell, use an AD-AS diagram with the LRAS

curve to illustrate the current situation of the U.S. economy graphically.

3- On the same diagram, explain and discuss how the Fed's action might "return the economy to price

stability".