The economy in the figure initially begins at point A and…
The economy in the figure initially begins at point A and a negative supply shock (real shock) takes it to point Y. The Fed reacts by increasing money growth, and therefore spending growth, by 3 percentage points. In response to the Fed’s actions, inflation would be [answer1] in the short run and [answer2] in the long run, and real GDP growth would be [answer3] in the short run and [answer4] in the long run.
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