The Federal Reserve’s Dilemma When Responding to a Real Shock (2) A real shock shifts the LRAS Curve to the left, moving the economy from point a to a recession at point b. If the Federal Reserve concentrates on the lower growth rate, it may decide to increase AD, with an increase in

moving the economy to point c with a little bit higher growth rate but a much higher inflation rate. Note that for clarity we have suppresed the old SRAS curve running through point a.