Mu*=5, Y*=2200, C*=1650, I*=300. Draw the bottom graph of the IS-LM model felating Y and P. Show what happens after the consumption shock that reduces output. What happens to prices and output in the short run and long run? (Phillips Curve implies an upward sloping SRAS)

3. Monetary Policy Using the Phillips Curve, 20 points In recent years, people have had fairly constant expectations of inflation around 2 percent. We will explore how people's expectations affect the Fed's policy behavior. Suppose the Phillips Curve is given by T, = 107 - B( 14, - 1) +V and short-run fluctuations in output and employment are captured by this version of Okun's Law AY = -2(up - u) Assume that v - 0, B - 0.5, and u = 4