(Solved): Starting in long-run equilibrium \( \left(Y=Y^{P} ; \pi=\pi^{e}\right) \), draw an Aggregate Demand ...

Starting in long-run equilibrium \( \left(Y=Y^{P} ; \pi=\pi^{e}\right) \), draw an Aggregate Demand-Aggregate Supply (ADAS) graph. Assume this economy is not near the zero lower bound (ZLB). Label everything throughout the entire problem. (a) Now, there is positive inflation shock. Illustrate the change from the initial long-run equilibrium (labeled " \( e_{1} \) ") to the new short-run equilibrium (labeled "e \( e_{2} \) "). (b) Next, illustrate the change from the short-run equilibrium (labeled "e \( e_{2} \) ") to the natural (no policy intervention) long-run equilibrium (labeled "e \( e_{3} \) "). (c) At the short-run equilibrium (labeled " \( e_{2} \) ") what monetary policy would you suggest? (d) Which part of the Fed's dual mandate have you chosen to target? Why?