Suppose output is below p

Suppose output is below p

Suppose output is below potential output in year 0. Prices that year are given by P0. In year 1 (with the level of potential output unchanged) the Fed stimulates the economy by shifting the aggregate demand curve until it interest the point (P0, Y*)A= Sketch the aggregate demand curve for years 0 and 1. Describe the action taken by the FedB=Assume that the price adjustment process is given by equation Pi = Pi _1 (- 1) + f ( y_1 – y*/y*) If inflation in year 0 was zero, how do prices behave in year 1? Sketch the price adjustment curve for year 1C=Explain why output in year 1 is above potentialD=In which direction should Fed have shifted the aggregate demand curve to set Y1 =Y*? Is it possible to say?E=Given the Fed?s action, is it possible to say whether prices will increase or decrease in year 2? Why or why not?

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