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ISMPADIA model. In January 21222, President Biden had the opportunity to replace Federal Reserve Chairman Jerome Powell with someone else. Suppose that President Biden had
ISMPADIA model. In January 21222, President Biden had the opportunity to replace Federal Reserve Chairman Jerome Powell with someone else. Suppose that President Biden had replaced Chairman Powell with a new Federal Reserve Chair who was more worried about ination and set interest rates higher than before. Assume that the economy starts out at potential output. a) What would happen to the real interest rate and output in the short 1111], according to the IS-MP model? Draw a diagram to help explain your answer. (Again, this part is just a quick repeat of question 5b from Problem Set 4 to get us started.) b) What would happen to the AD and IA curves in the short run? Draw a diagram to help explain your answer. What happens to output and ination in the short run? c) According to the IS-MP-AD-IA model, what would happen to output and ination over time? Draw a diagram to help explain your answer. d) Assuming the Fed maintains this new monetary policy rule indenitely, what would happen to the AD-IA and IS-lvEP diagrams in the long run? Draw those diagrams to explain your answer. e) What is the long-rim effect of the shock on output, ination, and the real interest rate\"?I What is the long-run effect of the shock on consumption, investment, and government purchases? Briey explain why
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