4. From an initial position of long-run equilibrium for the economy, describe the short- run and...

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4. From an initial position of long-run equilibrium for the economy, describe the short- run and long-run macroeconomic impact on output, inflation, and real interest rates of a surprise terrorist attack that destroys several large factories in a given country. Start your answer with a brief indication of its likely impact on potential output. In your answer. you should use the aggregate-demand, aggregate supply model developed in this course. Also assume that the Fed implicitly allows its target rate of inflation to change. For extra credit discuss how your answer would be modified if the terrorist attack resulted in the destruction of several factories in foreign countries as well as at home. 4. From an initial position of long-run equilibrium for the economy, describe the short- run and long-run macroeconomic impact on output, inflation, and real interest rates of a surprise terrorist attack that destroys several large factories in a given country. Start your answer with a brief indication of its likely impact on potential output. In your answer. you should use the aggregate-demand, aggregate supply model developed in this course. Also assume that the Fed implicitly allows its target rate of inflation to change. For extra credit discuss how your answer would be modified if the terrorist attack resulted in the destruction of several factories in foreign countries as well as at home.

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When a surprise terrorist attack destroys several large factories in a country it will likely have a significant negative impact on potential output P... View the full answer