Note: If you use graphs be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the terminal equilibrium values.

a. Describe how active (monetary) policy would respond (if at all) to stabilize inflation in response to the shock in pail (1.c). What is the likely effect of such policy response (if any) on output stability? (Hint: You can use the AD-AS model and then describe the effect of the shock, the policy response, and its effect on output and inflation with words).

b. Describe how would active (monetary) policy would respond (if at all) to stabilize economic activity in response to the shock in part (1.d). What is the likely effect of such policy response (if any) on price stability? (Hint: You can use the AD-AS model and then describe the effect of the shock, the policy response, and its effect on output and inflation with words).