Question: UsetheASADmodel to study theshort-, medium-,and long-run effect ofa permanent decreasein theinflation target of thecentral bank.Assumethat underlyinginflation in thecurrent period is simply equal to inflation which

UsetheAS–ADmodel to study theshort-, medium-,and long-run effect ofa permanent decreasein theinflation target of thecentral bank.Assumethat underlyinginflation in thecurrent period is simply equal to inflation which is observed in the previous period. Contrast your answer with thealternativeassumption that underlying inflation overshoots inflation in the previous period.

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