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1. Assume that the US economy begins at its long-run equilibrium with an inflation rate of 2%. Then, a large negative temporary supply shock hits
1. Assume that the US economy begins at its long-run equilibrium with an inflation rate of 2%. Then, a large negative temporary supply shock hits the economy, which lowers output and increases inflation. Suppose the central bank targets an inflation rate of 2%. a. What curve (using the AS-AD model) will the central bank shift to achieve its desired inflation rate? In which direction? b. In the short-run (after the policy response), what happens to inflation and output
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