(Solved): (AD-SRAS-LRAS Model and Policies) Consider the economy that is initially in its long-run equilibriu ...

(AD-SRAS-LRAS Model and Policies) Consider the economy that is initially in its long-run equilibrium. Suddenly, the economy experiences a permanent negative supply-shock, e.g., a permanent decrease in production capacity. (a) (3 points) Depict the economy in the initial and current scenarios in the AD-SRAS-LRAS model. (b) (7 points) If the government does nothing, how would the economy evolve? Explain verbally and plot the variables of real GDP, inflation rate and unemployment rate over time. (c) (7 points) If the government considers lower inflation rate as priority, what would it do? Explain verbally and plot the variables of real GDP, inflation rate and unemployment rate over time. (d) (3 points) Instead of the government as in part (c), if it is the Federal Reserve's policy to prioritize lower inflation. What would the Federal Reserve do?