1. Suppose there is a short-lived inflation shock that lowers inflation. Describe the effects on inflation, unemployment, and output in the short-run.
2. How does the slope of the ADI curve depend on monetary policy?
3. Suppose output is initially equal to potential GDP. Now assume the government cuts taxes and no change in government expenditures. How does this affect the ADI curve? What happens in the short-run to equilibrium output? Over time will inflation tend to rise or fall? Explain how the adjustment of inflation works to return the output gap to zero. What happens to the real rate of interest?
A plunge in inflation moves the ADI bend to left side. Initially inflation is steady, yet yield falls in light of the fact that AE falls. A fall in yield implies labor request falls, and this, because of sticky wages, causes unemployment in the work market. This slackness implies that pay development will hose, so value development or expansion, will hose. As
