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Economy that begins with output at potential

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Consider an economy that begins with output at potential and an inflation rate of ¯π, so the economy begins in steady state. A new chair of the central bank decides to lower the long-run inflation target to ¯π 0 < π¯. Show how the economy responds over time, using the AS/AD framework. (You should clearly label the axes and explain everything you want to show on your graph. You should also list the equations for AD and AS curves.) Comment on your results.

Reference no: EM132415188

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