This is a question from Jones macroeconomics Ch12 Monetary policy and the Phillips Curve. I found some
Question:
This is a question from Jones macroeconomics Ch12 Monetary policy and the Phillips Curve.
I found some solutions regarding the problem of oil shock but i couldn't find a graph related to it.
The question is this.
Suppose the economy is hit by an unexpected oil price shock that permanently raises oil prices by $50 per barrel.
Using the full short-run model, explain what happens to the economy in the absence of any monetary policy action. Be sure to include graphs showing how output and inflation respond over time.
The equation is pi(t)=pi(t-1) + vY(t) + o
Y(t) is a short run output.
In case of MP curve going downward as an inflation increase and nominal interest rate stay, Y increase and it move along the Phillips curve line.
It happens after MP curve shift upward. Finally MP curve would shift downward.
I think the inflation, time graph would look like line horizontal, line with big angle, and finally line with low angle.
Am i right? Thank you!