1. a. Suppose the stock market rises, increasing consumers' wealth and consumption. Show the effect on the AD/AS graph.
b. If there is an increase in the inflation rate, how would the Fed change the monetary policy so that there are more stable prices and GDP goes back to potential?
1. a AD would shift to the right and the SAS curve would shift up.
b. The Fed would employ the contractionary monetary policy and the equilibrium would be at potential GDP