Answer to Question 1
B
Answer to Question 2
The Fed's actions affect the inflation rate and the price level by changing expenditure plans. For instance, an expansionary policy by the Fed that lowers the interest rate increases consumption expenditure, investment, and net exports. All three of these changes boost aggregate demand so that the price level rises and the inflation rate increases. The effect on the price level and inflation rate is far from immediate because there are time lags in the process. The change in inflation is slower than the change in real GDP.
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