(Solved): Consider an AD-AS model with AD curve Y Y* = y( * ) + and AS curve = ...

Consider an AD-AS model with AD curve Y ? Y* = ??y(? ? ?* ) + €ð and AS curve ? = ?² + Oß(Y? Y*) + es with parameter values a = 2, y = 1, p = 1, ß = 2, and with inflation target * = 0.01 and potential output normalised to Y* = 1. Starting from a long-run equilibrium with Te = T*, suppose there is a temporary supply shock 0.05 and a temporary demand shock € = 0.05. Which of the following is TRUE? ES = In the short run, inflation is 1% above target In the short run, output is 2% below potential In the short run, the real interest rate rises O In the short run, the real interest rate falls