Assume that two shocks happen simultaneously: a positive expenditure shock (lets say a popular trend is to go for a bigger house) and a negative supply shock (lets say prices on imported inputs increased dramatically).

Use AE/PC Model (carefully labeled!!) without time lags (use the AE and PC graphs similarly to the textbook, place PC graph below AE graph). For your analysis, choose as a starting point (marked A) an economy operating at potential GDP (Y=Y*) and at its inflation target ( = !). Also, show point B where the economy is situated after the shocks but prior to any central bank policy response. There should be A and B on BOTH the upper (AE graph) and lower (PC graph) graphs. If points A and B are the same point, then just mark that point with both A and B. Mark initial curves with the superscript 1, like AE1 and PC1, and every subsequent shift with a higher number, like the second shift would be AE2 and PC2, and the third shift (if necessarily) would be AE3 and PC3 and so on.

Describe that situation. Now, assume the positive supply shock instead and determine the change in GDP and inflation. Describe that situation.