Suppose that the Central Bank of Macroland(CBM) follows a monetary policy rule as discussed in the textbook and lectures. Macroland is in long-run macroeconomic equilibrium. Suppose that people in Macroland decide the inflation rate is too high. As a result CBM permanently lowers the inflation target in its monetary policy rule permanently.

A) What happens to AD and AS curve in the first period after the change in the inflation target? (Do not attach pictures. Give a verbal description: "Curve X goes up/goes down/shifts left/gets steeper/gets flatter", etc.

B) What will happen to inflation and output in the first period after the change?

C) Now what will happen in periods 2, 3 and so on to inflation and output? Again, use the AD-AS framework.

D) Now suppose that residents of Macroland, as befits the name, are keen scholars of Macroeconomics and pay a lot of attention to macroeconomic policy. Suppose that they trust the MCB to get inflation under control and hold rational expectations. Now what will happen to inflation and output under these assumptions?