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Question 2 [16 points] Dynamic AS-AD model. The current recession caused by the COVID-19 pandemic has reduced demand for Australian goods. Your task is to understand how this adverse aggregate demand shock affects the Australian economy and the use of monetary policy in stabilizing the economy. You will use the Dynamic Aggregate Supply-Aggregate Demand model (developed in Lectures 10, 11 and 12) to analyze this scenario. For simplicity, suppose the natural level of output is constant. Each period in the model lasts a year. Interest rate and inflation are expressed in percentage points. The parameter values of the model are provided in Table 2 below. NNS 0.60 1 0.30 Table 2: DAS-DAD model - Benchmark Parameter Values (1) Using the parameter values in Table 2, calculate the long-run equilibrium values of inflation, output, and the nominal and real interest rates. (1 point) (2) Suppose the economy was initially in its long-run equilibrium. At year & = 1 the economy was hit by a persistent adverse aggregate demand shock (captured by