Let€™s look at the Federal Reserve€™s dilemma when there€™s a positive shock to the long-run aggregate supply curve. We€™ll consider the reverse of Figures 35.3 and 35.4.
a. In the following figure, illustrate the effect of this positive potential growth shock, ignoring the possible effect of sticky wages and prices.

b. If the central bank kept AD fixed, would inflation be higher or lower after this positive real shock? Would real growth be higher or lower after this positive real shock?
c. If the central bank wants to return inflation to its old level, should it raise money growth or lower it?
d. If the central bank wants to return real growth to its old level, should it raise money growth or lower it?
e. Economists say that central bankers face a €œcruel trade-off€ between inflation and real growth when a potential growth shock hits. Do your answer to parts c and d fit in with this theory?

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Old Solow growth rate Inflation rate Old SRAS AD Real GDP growth rate growth rate