Question: Suppose instead of waiting for the economy described in question
Suppose, instead of waiting for the economy described in question 13 to return to long-run equilibrium, the central bank opted to use the positive supply shock as an opportunity to move to a lower inflation target. Illustrate the impact of this change in the inflation target using an aggregate demand-aggregate supply diagram. Compare this with a graph of a situation where the central bank lowers its inflation target in the absence of a positive supply shock.
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