Assume that two shocks happen simultaneously: a permanent increase in government spending (expenditure shock) and an increase in prices on imported intermediary goods (supply shock). Use AE/PC Model (carefully labeled!!) without time lags (use the AE and PC graphs similarly to the textbook, place PC graph below AE graph). For your analysis, choose as a starting point (marked A) an economy operating at potential GDP (Y=Y*) and at its inflation target ( = !). Also, show point B where the economy is situated after the shocks but prior to any central bank policy response. There should be A and B on BOTH the upper (AE graph) and lower (PC graph) graphs. If points A and B are the same point, then just mark that point with both A and B. Mark initial curves with the superscript 1, like AE1 and PC1 , and every subsequent shift with a higher number, like the second shift would be AE2 and PC2 , and the third shift (if necessarily) would be AE3 and PC3 and so on. Describe that situation. Now, assume that the central back is following non-accommodative monetary policy and the prime concern is inflation. What actions do you expect to see? State and advocate your points. ______________________________