Answer
a) Please see the graphs. The short run aggregate demand curve shifts to the right. This causes the output to fall (as well as the level of employment in the economy). (In other words, the unemployment level will increase.) However, the inflation rate and the price level are ambiguous.
Work Step by Step
b) If the Fed decides to adjust monetary policy to keep unemployment and output at their normal levels, then the Fed would need to use expansionary monetary policy. The expansionary monetary policy would increase the price level and the inflation rate.
c) The Fed might not choose to follow the actions in part (b) since the inflation rate would also increase.
