Question: a)Suppose there is a permanent positive supply shock. Explain, using a diagram, what would happen to output and inflation (in both the short run and

a)Suppose there is a permanent positive supply shock. Explain, using a diagram, what would happen to output and inflation (in both the short run and the long run) when there is no monetary policy response.(3 marks)

b)Using your diagram in (a) explain how the central bank can use monetary policy to counteract the effects of a permanent positive supply shock. (2 marks)

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