: Use an AD–AS graph to illustrate the initial equilibrium and the short-run equilibrium after the shocks. Do we know with certainty whether in the new equilibrium the output level will be higher or lower than potential GDP? B: Suppose that the Fed decides not to intervene with monetary policy. Show how the economy will adjust back to long-run equilibrium. C: Now suppose that the Fed decides to intervene with monetary policy. If the Fed’s policy is successful, show how the economy adjusts back to long-run equilibrium.
Assume that the economy is initially in equilibrium at potential GDP. Then suppose that the economy is hit simultaneously with a positive aggregate demand shock and a negative
A: Use an AD–AS graph to illustrate the initial equilibrium and the short-run equilibrium after the shocks. Do we know with certainty whether in the new equilibrium the output level will be higher or lower than potential GDP?
B: Suppose that the Fed decides not to intervene with
C: Now suppose that the Fed decides to intervene with monetary policy. If the Fed’s policy is successful, show how the economy adjusts back to long-run equilibrium.
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