IS-MP-AD-IA model. Prior to a pandemic, the President was very critical of the Federal Reserve and its chairman. Suppose the Chairman resigned and was replaced with a new Federal Reserve Chairman who is less worried about inflation and sets interest rates lower 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 run, according to the IS-MP model? Draw a diagram to help explain your answer.

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 inflation in the short run?

c) According to the IS-MP-AD-IA model, what would happen to output and inflation over time? Draw a diagram to help explain your answer.

d) Assuming the Fed maintains this new monetary policy rule indefinitely, what would happen to the AD-IA and IS-MP diagrams in the long run? Draw those diagrams to explain your answer.

e) What is the long-run effect of the shock on output, inflation, and the real interest rate? What is the long-run effect of the shock on consumption, investment, and government purchases? Briefly explain why.