3. A consumption boom: Using the IS-MP diagram, explain what happens to the economy if there is a temporary consumption boom that lasts for one period. (a) Initially; suppose the central bank keeps the nominal interest rate unchanged. (b) Suppose you are appointed to chair the Federal Reserve. What monetary policy action would you take in this case and why? Refer to the IS-MP diagram. 12. The productivity slowdown and the Great Inflation: Using the IS-MP diagram and the Phillips curve, explain how the productivity slowdown of the 1970 s may have contributed to the Great Inflation. In particular, answer the following: (a) Suppose growth in actual output is slowing down, as shown in Figure 12.13. Policymakers believe this is occurring because of a negative shock to aggregate demand. Explain how such a shock would account for the slowdown using an IS-MP diagram. (b) With this belief, what monetary policy action would policymakers take to stabilize the economy? Show this in the IS-MP diagram, as perceived by policymakers. (c) In truth, there was a slowdown in potential output, as also shown in Figure 12.13. Show the effect of monetary policy on short ran outpit is the "true" IS-MP diagram. (d) Show the effect of this monetary policy in a graph of the Mhillips cursc Explain what happens. (e) How will policymakers from parts (a) and (b) know they have riade a