11. For the economy described in Problem 10, suppose that the central bank’s policy reaction function is as follows: LO 11.2 HARD RATE OF INFLATION, π REAL INTEREST RATE, r 0.0 0.04 0.01 0.045 0.02 0.05 0.03 0.055 0.04 0.06

a)Construct a table showing the relationship between short-run equilibrium output and the inflation rate for values of inflation

between 0 and 4 per cent. Graph the AD curve of the economy. b)Suppose that the central bank decides to lower the real interest rate by 0.5 percentage point at each value of inflation. Repeat part (a). How does this change in monetary policy affect the AD curve?