Question 63

Assume that the output deviates from its potential level because of an increase in energy price. If the central bank responds to the supply shock passively (partly accommodative: it raises the real interest rate, but not by enough),

(To have a full mark in this question, you NEED to explain your answer using AE/PC model (with graphs). Please provide your solution

a)

the AE curve shifts down and the Phillips curves shift up

b)

both the AE curve and the Phillips curves shift down

c)

both the AE curve and the Phillips curves shift up

d)

None of the answers are correct

e)

the AE curve shifts up and the Phillips curves shift down