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(c) After the oil shocks in the mid 49705 , ination rose sharply in many countries , Using the AD / AS diagram ,show what

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(c) After the oil shocks in the mid 49705 , ination rose sharply in many countries , Using the AD / AS diagram ,show what happens in this economy following an ination shock that lasts only one year. Explain each step carefully, and briefly discuss whether a recession is necessary. (6 points) ((1) Suppose that, instead of having adaptive expectations , people in this economy have rational expectations. The Phillips Curve (AS curve) can now be written as: art : n: + Yt + 6. If the central bank has a credible ination target at If, and expectations are anchored at fr, how would your answer to part (0) change? Explain.{5 points)

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