In the (A D / A S) diagram here, the economy is in longrun equilibrium with real
Question:
In the \(A D / A S\) diagram here, the economy is in longrun equilibrium with real GDP equal to \(Y^{*}\); the price level is stable at \(P_{0}\).
a. Suppose the central bank announces that it will implement an expansionary monetary policy that will shift the \(A D\) curve up by 5 percent. Show the likely effect of this announcement on the \(A S\) curve.
b. Does the shift of the \(A S\) curve in part
(a) depend on whether workers and firms believe the central bank's announcement? Explain.
c. In a new \(A D / A S\) diagram, show how a sustained and constant inflation of 5 percent is represented (with \(Y=Y^{*}\) ).
d. In the absence of any supply shocks, explain why a constant inflation is only possible when real GDP is equal to \(Y^{*}\).
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