Suppose that the Central Bank follows a monetary policy rule as discussed in the textbook and lectures. The country is in the long-run macroeconomic equilibrium. Suppose that in period 1 the country experiences a 3% inflation shock that lasts only for one period, so in periods 2, 3 and so on there is no inflation shock.

What happens to inflation and output in period 1? Does inflation rise by more or by less than 3%? (Use the AD-AS framework to figure out the answer.)

Now what will happen to inflation and output in period 2, 3 and so on. Again, use AD-AS to derive the answer.