A consumption boom. Explain what happens to the economy if there is a temporary consumption boom that lasts for one period: ac increases at period 5. a) Initially, suppose the central bank keeps the real interest rate (rt) unchanged. b) Suppose you are appointed to chair the Federal Reserve. What monetary policy action would you take in this case and why? For each case, use the IS-MP diagram and the Phillips curve to show what happens to the economy. Also, provide graphs of the real interest rate, output and inflation over time: r vs t, Ỹt vs t, π vs t; assume the consumption shock happens at t=5.¹

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