4 The economy shown in the graph is initially on aggregate demand curve AD and short-run aggregate supply curve SAS0. Then short-run aggregate supply decreases and the short-run aggregate supply curve shifts upward to SAS1.

a What is the equilibrium real GDP and price level? b What type of event could have caused the decrease in short-run aggregate supply? c If the government follows a fixed-rule monetary policy, what happens to real GDP and the price level? Trace the immediate effects and the adjustment as short-run aggregate supply returns to its original level. d If the government follows a feedback-rule monetary policy, what happens to real GDP and the price level? Trace the immediate effects and the adjustment as aggregate demand and short-run aggregate supply respond to the policy action.

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Price level (GDP deflator, 2000 =100) 160 150 140 130 120 110 100- 90 80 0 LAS SAS SAS AD 650 700 750 800 850 900 Real GDP (billions of 2000 euros)