Assume that two shocks happen simultaneously: a positive

expenditure shock (let's say a popular trend is to go for a bigger house) and a

positive supply shock (let's say prices on imported inputs decreased dramatically

due to a substantial reduction in tariffs). 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.