The Fed does nothing. Price expectations adjust as usual. How would output and prices evolve over time? Explain the intuition. Now consider the case where price expectations are well anchored (treat them as fixed). How does this change the outcome? What does the Fed gain from anchoring expectations. Hint: What happens to SR-AS while is high? Next consider the case where the Fed stabilizes output at the original (pre shock) through the entire episode. Price expectations move around as usual. Is there a risk that inflation expectations might get entrenched (although that is not in our model)