Application of the Short-Run Model - The Productivity Slowdown, the Great Inflation, and the Volcker Disinflation

Using the IS-MP-PC Model, explain how the productivity slowdown in the 1970s may have contributed to the Great Inflation

Suppose growth in actual output is slowing down. Policymakers believe this is occurring because of a negative shock to aggregate demand. Show how such a shock would account for the slowdown in the IS-MP diagram.

1-2) With this belief, what monetary policy action would policymakers take to stabilize the economy? Show this in the IS-MP diagram, as perceived by policymakers.