In early 2011, unrest in the Middle East caused a sharp increase in the price of oil. Suppose that the economy was below potential GDP at prior to the oil shock, as shown at point A on the following Phillips curve graph:

a. If the Fed keeps the real interest rate constant, show on the graph a possible short-run equilibrium inflation rate and output gap.
b. If the Fed acts to keep the inflation rate constant, show the new short-run equilibrium.

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PC2 PC, Output gap,Y (percent deviation from potential GDP)