Consider the full short-run model (IS-MP-PC). You need to draw a diagram and answer the questions below. The IS-MP-PC Model is a 2-part diagram. The top part contains the IS and MP curves. The bottom part contains the PC curve. In both cases the horizontal axis measures SRO (short-run output).

In year 1, a new administration announces that publicly traded companies will be required to disclose their financial information with greater detail and more clarity. As a result, there is a reduction in the uncertainty about the creditworthiness of all major companies that is reflected in a sharp drop in the spreads of corporate bonds relative to government bonds. Assuming the Fed keeps the interest rate unchanged, think about which curves need to shift in the IS-MP-PC diagram. Update the diagram and label the new equilibrium as point B (in top and bottom diagram). Which of the statements below is correct?

• The economy experiences an inflation shock and we move up along the PC curve.

• The economy experiences an inflation shock and the PC curve shifts up.

• Borrowing costs decrease and the MP curve shifts down.

• Borrowing costs increase and the MP curve shifts up.

Draw a diagram and a short written description