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Question
Assume the economy is operating at the full-employment level of output.
The Federal Reserve decides to decrease the discount rate. Explain how each of the following is impacted as a result of the Fed’s action:
Nominal interest rates
Aggregate demand
Price level
Assume the Fed’s action is successful in changing the economy. Using a correctly drawn and labeled Phillips curve, show and explain how this policy will affect each of the following as the economy approaches a new equilibrium:
the Phillips curve
the natural rate of unemployment
