On a carefully labelled graph, draw the dynamic aggregate supply curve. Explain why it has the slope it has.
On a carefully labelled graph, draw the dynamic aggregate demand curve. Explain why it has the slope it has.
A central bank has a new head, who decides to raise the target inflation rate from 2 to 3 percent. Using a graph of the dynamic AD–AS model, show the effect of this change. What happens to the nominal interest rate immediately upon the change in policy and in the long run? Explain.
A central bank has a new head, who decides to increase the response of interest rates to inflation. How does this change in policy alter the response of the economy to a supply shock? Give both a graphical answer and a more intuitive economic explanation.