1 Suppose, annualized growth in inflation rate is I 4.5 = 1.2*(1+I) ^3 (1+I)^3 = 4.5/1.2 = 3.75= 1.553^ (1/3) I = 55.3% In an economy, when GDP is growing consistently and unemployment rate is also falling. Though, growth rate in inflation rate is very high and it is approx. 55.3%. It means that demand is increasing and it is more than the supply. It is also causing overheating of the economy. Here, more money is chasing few goods. It leads to further increase in price. And it drives inflation on the higher side. Data given the problem confirms the economic scenario mentioned. It propels the inflation further and it is very high as a proof. 2 Inflation is growing with annualized rate of 55.3%. In this case, Federal Reserve should use contraction policy. As a part of it, Federal Reserve should deploy right money policy. It will discourage people to borrow and demand will come down. Thus, inflation will be controlled. 3. Federal Reserve can increase reserve requirements. Further, Federal Reserve can also sell government securities in open market. It will suck cash out of the system and contractionary policy will be implemented. Reduced government expending will also help. It will help curbing the inflation. 4 If recession happens and due to this reason, layoff takes place as well as demand decreases then contractionary economic policy will be ineffective. In those circumstances, Federal Reserve has to reverse the strategy. Technological change can also make a reduction in demand of products. In that industry, contractionary policy will be discouraging. Also, for those product categories where demand is inelastic in nature. Contractionary policy will not work. Note: Already answered similar question on Chegg Q&A board. Thus, above answer is the modified version as per the requirements mentioned in the question. Solution 1 Suppose, annualized growth in inflation rate is I 4.5 = 1.2*(1+I) ^3 (1+I)^3 = 4.5/1.2 = 3.75= 1.553^ (1/3) I = 55.3% In an economy, when GDP is growing consistently and unemployment rate is also falling. Though, growth rate in inflation rate is very high and it is approx. 55.3%. It means that demand is increasing and it is more than the supply. It is also causing overheating of the economy. Here, more money is chasing few goods. It leads to further increase in price. And it drives inflation on the higher side. Data given the problem confirms the economic scenario mentioned. It propels the inflation further and it is very high as a proof. 2 Inflation is growing with annualized rate of 55.3%. In this case, Federal Reserve should use contraction policy. As a part of it, Federal Reserve should deploy right money policy. It will discourage people to borrow and demand will come down. Thus, inflation will be controlled. 3. Federal Reserve can increase reserve requirements. Further, Federal Reserve can also sell government securities in open market. It will suck cash out of the system and contractionary policy will be implemented. Red.

1. Dear,
The answer is 25.
Solution
Dear,
The answer is 25.