Help me understand why the rpt = 0 (risk premium effecting aggregate demand intercept) makes the new AD curve need to intersect with the inflation target at output gap = 0. : QUESTION: In period 4, investors and financial institutions realize that the risk premium they charged was too low and return it back to rpt = 0. The inflation target of the Fed stays at = 0. Plot curves AD4 and AS4 in the AS/AD diagram, denote the new equilibrium E4 and extend the graph of the time path appropriately. ANSWER: In this period, the risk premium shock vanishes, so the aggregate demand curve AD4 must have zero horizontal intercept at the new inflation target pi' = 0. The aggregate supply curve AS4 now shifts down because inflation 3 was lower than 2 (again observe where the vertical intercept of the AS4 curve lies). The new equilibrium is E4