Question 2 {5 points): Assume that two shocks happen simultaneously: a permanent increase in government spending (expenditure shock) and an increase in prices on imported intermediary goods (supply shock). Use AEfPC Model (carefully labeledll) without time lags (use the AE and PC graphs similarly to the textbook, place PC graph below AE graph). For your analysis, choose as a starting point (marked A) an economy operating at potential GDP (Y =Y*) and at its ination target (it = HT). Also, show point B where the economy is situated after the shocks but prior to any central bank policy response. There should be A and B on BOTH the upper (AE graph) and lower (PC graph) graphs. If points A and B are the same point, then just mark that point with both A and B. Mark initial curves with the superscript 1, like AE1 and PC, and every subsequent shift with a higher number, like the second shift would be AE2 and PC2, and the third shift (if necessarily) would be AE3 and PC3 and so on. Describe that situation. Now, assume that the central back is following non-accommodative monetary policy and the prime concern is ination. What actions do you expect to see? State and advocate your points