Discuss both parts from the point of view of a classical economist as well as a Keynesian economist.
In September, 2006 the overall CPI fell by 0.5 percent but the core CPI edged higher just enough to make inflation a concern. Draw the AD and AS graph of the economy, label everything. Show the effect of the fall in CPI on your graph.
a. What is the Fed’s most likely response to a situation like this one? Will the Fed tighten or ease? Explain the Fed’s action and its consequences for real GDP and the inflation rate.
b. If the inflation rate rises, what effect will the Fed’s decision to not change the federal funds rate have on the U.S. economy? If the economy slips into recession, what effect will the Fed’s no-change decision have on the economy
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