Now assume that up to period t = 2012 this economy has been resting at the steady

state, and the shocksa ando have been equal to their long run values (i.e., zero). Let

= 0.04,b = 0.8, m = 0.8, andv = 0.5. After many years of nothing happening in this

economy, a supply shock hits, and the parametero obtains the valueo = 0.03 for exactly

two periods, t = 2013, 2014. Starting from t = 2015,o returns to zero.

b) Start with a graph that represents the steady state equilibrium (like in part (a)),

and indicate the change that this supply shock will imply on the AS curve in t = 2013.

What is the level of inflation and short run output in t = 2013? (4 points)

c) What is the algebraic form of AS in t = 2014? What is the level of inflation and

short run output in t = 2014? (4 points)

d) What is the algebraic form of AS in t = 2015? What is the level of inflation and

short run output in t = 2015? (4 points)

e) Assuming that no more shocks occur after 2015, draw a graph that indicates the

path of inflation over time (start at t = 2005, i.e., a few years before the shocks and let t

go all the way to t = 2050, i.e., give the economy enough time so that you can show what

happens in the long-run) (4 points)