1. Consider a standard AD-AS model. If the consumption function displays relatively little sensitivity to real interest rates, temporary supply shocks have relatively large effect on output.

Is this true of false and provide brief explanations

1. Consider a standard AD-AS model.

The economy is affected by the following sequence of events. In period 1 there is a shock to the economy that is temporary. In period 2, the shock ends. But having observed an inflation outcome different to the inflation target, inflation expectations change from the inflation target to a value exactly equal to the observed inflation in period 1 (that is, expectations are not `anchored').

A temporary negative demand shock would lead to output below potential in period 1, but above potential in period 2. Answer true or false. Please briefly explain your answer.