The effects of a reduction in exports in the IS-MP-PC model. Set the stage by drawing the diagram corresponding to a situation where there are no AD shocks (a=0), the Fed sets the real interest rate equal to the MPK, and there are no inflation shocks either (0=0). Label the initial equilibrium as point A in the diagram, both in the top and bottom parts of the diagram. Suppose that Europe enters a severe recession and, as a result, American exports to Europe fall dramatically. The Fed keeps the interest rate unchanged. Think about which curves need to shift in the IS-MP.PC diagram. Update the diagram and label the new equilibrium as point B (in top and bottom diagram). Which of the statements below is correct?" "The reduction in exports (aX falls) is a positive aggregate demand shock (a>0). As a result, in the IS-MP diagram, the IS curve shifts to the right. Because the interest rate is unchanged, SRO now turns positive (point B). In the PC diagram, we move up along the curve so that inflation rises abovethe initial level." The reduction in exports (aX falls) is a negative aggregate demand shock (a