Economic Fluctuations: A significant scare a decade ago related to the change of the millennium, "Y2K." One worry the Federal Reserve had was that bank computers and ATMs might malfunction on January 1 of the new century. Analyze this situation in terms of aggregate demand and aggregate supply curves from chapter 9 (based on the quantity theory of demand where price is fixed in the short run but flexible in the long run). Regard this as a fall in money velocity that is temporary, just affecting the short run but returning to normal in the long run.
a) Which should the Federal Reserve have worried about: a possible recession or excessive inflation? Explain.
b) Discuss what monetary policy actions you would suggest to prevent any such problems. (Be specific about what you would do in the short run and in the long run.)