Analytics: Let LRAS equal the long run aggregate supply curve and AD equal the aggregate demand curve. In equation format, we have

LRAS: Qs = 25

AD: P = 112.5 - .5 * Qd

Where Qs and Qd are real GDP and P is the consumer price index.

a. What does P equal in equilibrium (Qs = Qd)?

b. If the Federal Reserve lowered the IORB and RPP rates affectively lowering the Fed Funds Rate (expansionary policy) so that the 112.5 changes to 125 in the AD equation, what happens to the AD curve, equilibrium real GDP, and the consumer price index? Explain.

c. How much is the inflation rate?