Final answer:
Implementing contractionary monetary policy to increase interest rates and decrease aggregate demand would align with the goal of reducing inflation, with a slight possible increase in unemployment moving it back towards the natural rate of 5.5%.
Step-by-step explanation:
If I were on the Fed's Open Market Committee and the current inflation rate is at 6% with an unemployment rate of 5%, considering that the natural rate of unemployment is estimated to be 5.5%, my prescribed action would be to implement contractionary monetary policy. This usually entails increasing interest rates through the sale of government bonds, which would decrease aggregate demand (AD) and calm down inflationary pressures. While this may slightly increase the unemployment rate in the short term, it aligns with the goal of reducing inflation toward a target rate, typically around 2-3%.
Using the AD-AS graphs, this action would shift the AD curve to the left, resulting in a lower price level (inflation) and a slight increase in unemployment, moving it back towards the natural rate. Over the long term, this positions the economy for sustainable growth with stable prices. It's important to balance these objectives, as historical data suggests that deviations from the natural rate of unemployment are corrected over time, often with associated changes in the inflation rate.