Q2. The self-correcting mechanism at the zero lower bound (7 points) Consider the economy in the figure below, which has experienced a large negative demand shock and is currently at the short-run equilibrium point 2. (Use the blue curves to draw shifts) LRAS AS ADZ AD Hb i) What is the level of expected inflation associated with the AS curve shown in the figure below? (Just answer it is Ma, me or Iz ) "i) Is the nominal interest rate i higher in the original equilibrium at point 1, or in the new equilibrium at point 2? ili) As people change their expectations about future inflation, what curve(s) in the diagram above shift? Draw the shift(s) in the diagram above. i) When the shift(s) described in part (iii) take place, what happens to inflation and real output (increase or decrease)? Does the self-correcting mechanism work