Use the accompanying figure to answer questions a and b. (a) Suppose the economy is self-regulating and
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(a) Suppose the economy is self-regulating and is at point A when there is a one-shot demand-induced inflation. If there are no other changes in the economy, at what point will the economy settle?
(b) Suppose the economy is at point A when it is faced with two adverse supply-side shocks. The Fed tries to counter these shocks by increasing aggregate demand. What path will the economy follow?
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LRAS SRAS3 SRAS2 SRAS AD2 AD Real GDP
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a Assuming that AD moves to AD 2 the economy would move to point E in the sho...View the full answer
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