Assume that the economy is at potential output and the natural rate of unemployment and that inflation is at the target rate set for the central bank by the government. In each of the following scenarios apply the integrated EAPC, DAD/DAS and IS/MP framework to analyse the economy’s adjustment path.

(a)  A temporary fall in aggregate demand under the assumption that inflationary expectations remain anchored. 

(b)  A temporary fall in aggregate demand where inflationary expectations are based on the rate of inflation in the previous period.

(c)  A temporary positive supply shock where inflationary expectations are based on the rate of inflation in the previous period.