APMacro: Practice FRQ


The United States is experiencing a high rate of unemployment. Identify one fiscal policy action that Congress might initiate to decrease the unemployment rate. Assume that the policy you identified reduced unemployment, but the economy is still operating below full employment. Using a correctly labeled aggregate demand-aggregate supply graph, show and explain how the action you identified would affect output and price level. Explain how the policy you identified would affect short-term interest rates. Given that the economy is still below full employment, identify the open market policy the Federal Reserve could implement to increase the money supply. Using correctly labeled graphs, show and explain how the increase in money supply will affect short-term interest rates, output, and price level.



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