5. [Total points: 10]

a) Think about the great financial crisis (GFC) in late 2000s.

i) According to you what kind of shock it was - AD/AS? (1 point)

ii) With 3-equation model (IS-PC-MR) explain the consequences of the crisis on worldwide output, unemployment, and inflation. Make sure to draw the graphs (IS, WS-PS, MR-PC) to explain the scenario. (3 points)

iii) In the above diagram from (ii), show the optimal response of the Central Bank to deal with such recession. (2 points)

iv) Mention whether the shock is permanent or temporary. (1 point)

b) Do you think the crisis leads the world economy into deflation trap? With the reference of your previous diagrams, explain your answer properly. (3 points)