Question: Policy makers can respond to shocks in two possible ways i.e. no policy response and policy stabilization of economic activity and inflation. (a) Demonstrate how

Policy makers can respond to shocks in two possible ways i.e. no policy response and policy stabilization of economic activity and inflation.

(a) Demonstrate how aggregate demand and aggregate supply would change following an aggregate demand shock followed by no policy response.

(b) In the same way, use the AS- AD framework to demonstrate how aggregate output and inflation would perform following an aggregate demand shock accompanied by stabilization measures

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