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Price level and real output

1. State the final impact of cost-push inflation on the price-level and real output.

2. State the final impact of demand-pull inflation on the price-level and real output.

3. Identify the three Federal Reserve tools used to undertake an easy monetary policy.

4. Identify the three Federal Reserve tools used to undertake a tight monetary policy.

Solution Preview

1. As the costs of goods increase, demand would fall as people would find their incomes would not purchase as many goods. Companies would be forced to lay off workers. This combination of inflation and lower output is termed "stagflation" as was an issue in the 1970s and 1980s.

2. Demand pull inflation results when consumers purchasing goods beyond what the economy can easily produce. Bidding against each other, they drive up prices, while also encouraging a greater level of economic output. The economy settles at a higher price level, but also a higher output level.

3. The Federal Reserve uses open market operations, changes in the the reserve requirement, and changes in the ...

Solution Summary

Monetary policy, inflation, and real output.

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