At time t, the short-run equilibrium of a national economy is located at the potential GDP...

  

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At time t, the short-run equilibrium of a national economy is located at the potential GDP and inflation target. Suppose that the economy is hit simultaneously with a temporary negative demand shock and a temporary positive supply shock at time t + 1. A. Use an AD-AS graph to illustrate the initial equilibrium at time t and the equilibrium after the shocks at time t + 1. You must analyze two cases: (i) the size of AD shift is relatively greater than the size of AS shift; and (ii) the size of AS shift is relatively greater than the size of AD shift. B. Suppose the Fed decides not to intervene with monetary policy. Show how the economy will adjust back to long-run equilibrium. C. Suppose the Fed decides to intervene with easing/tightening monetary policies. Is it possible for the economy to restore the inflation target? Explain and show your evidence through the AD-AS analysis. D. Explain how technological advances at t + 1 can contribute to achieving the inflation target (in the long-run) even if those temporary shocks occurred. At time t, the short-run equilibrium of a national economy is located at the potential GDP and inflation target. Suppose that the economy is hit simultaneously with a temporary negative demand shock and a temporary positive supply shock at time t + 1. A. Use an AD-AS graph to illustrate the initial equilibrium at time t and the equilibrium after the shocks at time t + 1. You must analyze two cases: (i) the size of AD shift is relatively greater than the size of AS shift; and (ii) the size of AS shift is relatively greater than the size of AD shift. B. Suppose the Fed decides not to intervene with monetary policy. Show how the economy will adjust back to long-run equilibrium. C. Suppose the Fed decides to intervene with easing/tightening monetary policies. Is it possible for the economy to restore the inflation target? Explain and show your evidence through the AD-AS analysis. D. Explain how technological advances at t + 1 can contribute to achieving the inflation target (in the long-run) even if those temporary shocks occurred.

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i If the size of AD shift is relatively greater than the size of AS shift The initial equilibrium at time t will be located at the potential GDP and i... View the full answer