Suppose last month's inflation report estimated monthly inflation to be 0.4% over the month. The monetary authorities want inflation to not exceed 2% per year. Estimates of potential output state that our economy is currently near potential output. Unemployment rates have been stable at around 5%, but these rates have been rising slightly in the past months. Give a brief summary of what policy makers might be concerned about and suggest what you might do about it, if anything at all. Support your recommendations with analysis using the AS/AD model to illustrate your points.
Draw your AS and AD graph. To lower prices and raise output, you would want the supply curve to shift outward. What government policies could do this? Take a shot.
