We know that the Federal Reserve lowered its target range for the federal funds rate to 0 - 25 basis points as of March 2020 and has held that instrument steady in the time since. Thus, we are in a zero lower bound environment and policymakers must address difficulties related to these current economic conditions.

a.Suppose OPEC countries agree to increase global oil production in anticipation of improved economic sentiment in the coming months. Given the zero lower bound environment, illustrate and explain the short-run effects that changing conditions in the oil market would have on the US economy today (equilibrium output, inflation, and interest rates). Use the MP curve and AD/AS framework.

b.How can the Fed utilize unconventional policies to address the situation described above? Illustrate the effects this would have on the AD/AS framework.