In this question, you should suppose the economy is at a long-run equilibrium in which inflation is above the Fed's target and is then hit by a positive permanent shock to the LRAS curve.

a. Explain why this shock may be a good way to think about the impact of the elements of the 2021 infrastructure bill: https://www.whitehouse.gov/bipartisan-infrastructure-law/.

b. Using an AD-AS picture, explain how the shock affects inflation if the Fed doesn't shift the MP curve. Your answer should include the short-run impact and the long-run impact on inflation.

c. Given the Fed's dual mandate objectives, explain using an AD-AS picture how it should shift the MP curve in response to the positive shock to the LRAS curve. (Here, you may ignore the zero lower bound.) Explain how inflation and output evolve over the short and long run in response to the joint effect of the LRAS shift and the Fed's policy change.