Suppose Inflationary Pressures Are Building Up in an Economy

Essay

Suppose inflationary pressures are building up in an economy. Is this economy likely to experience a recessionary gap or an inflationary gap? Explain how the Fed could use monetary policy to combat inflation. A complete answer must include an explanation of the policy tools that can be used and their effects on the money supply, interest rates, and aggregate demand. Use a diagram of LRAS, SRAS, and AD to illustrate your answer.