Due to current concerns about the rise in prices (i.e., inflation), the Federal Reserve has decided to execute a contractionary monetary policy by reducing the supply of money and the quantity of available loans. i. Describe one tool that Federal Reserve can use to implement a contractionary monetary policy. ii. Use the diagram for the market of loanable funds to show the impact of the contractionary monetary policy on the interest rate and the quantity of loanable funds. 111. Use the AD/AS graph to show how changes in the interest rate and the quantity of loanable funds affect the aggregate demand. iv. What are the overall impacts of the contractionary monetary policy on real GDP, unemployment, and inflation?
