The following table shows the inflation rate and output level for four consecutive periods in a given
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The following table shows the inflation rate and output level for four consecutive periods in a given economy. In period 1, the economy is at its long-run equilibrium (i.e., the inflation rate equals its target and output equals potential output). In period 2, there is a temporary supply shock (e.g., an increase in energy prices).
a) Based on the table, determine which type of response was implemented by policy makers (e.g., no response versus stabilizing inflation or economic activity).
b) Show your argument using a graph (draw the MP curve and the AD/AS diagram consistent with the table data).
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Answer Explanation a Based on the data provided it appears that policymakers implemented a no response approach in the face of the temporary supply shock in period 2 Reasons for this approach Period 1 ...View the full answer
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