1. Some graphs to lecture 8, ch 19 and 20 in IAM.
RNy

2. y AD With high b AD With low b Inflation
With high b, π need not fall so much in order to increase the real interest rate. AD
With low b y

3. y AD With low h AD With high h Inflation
With low h, an increase in π leads to only a small increase in the real interest rate. Therefore a small reduction in y AD
With high h y

4. The short-run equilibrium
Inflation
SRAS
Position in t=0 πo AD
Position in t=0 yo y
The short-run equilibrium

5. The long-run equilibrium
Inflation
LRAS Π* AD y- y
The long-run equilibrium

6. SRAS
Position in t=0
Inflation πo Π* AD
Position in t=0 y yo Y_
Dynamic adjustment from initial situation to long-run equilibirum (no shocks during the process)

7. The response to a temporary demand shock
Inflation
LRAS
SRAS, t=2
SRAS, t=0, t=1. C B
πo=π* A
AD, t=1
AD, t=0, t=2, t=3……….
Yo=y_ y
The response to a temporary demand shock

8. However, the real interst rate increased.
Inflation
LRAS
SRAS, t=2
SRAS, t=0, t=1 C B
πo=π* A
AD, t=1,
AD, t=0,
Yo=y_ y
The response to a permanent temporary demand shock. Without the i-target, the new equilib would be at C.
However, the real interst rate increased.

9. Effects of negative demand shock. h>0 in both AD curves.
AD ( b >0)
Inflation
With b=0 there is no interest rate reduction initially.
b > 0 reduces the effect on both output and inflation. Policy is countercyclical. A B B
AD, b=0 y
Effects of negative demand shock. h>0 in both AD curves.

10. AD ( b >0) and h low
Inflation B
With b=0 there is no interest rate reduction initially.
b > 0 reduces the effect on both output and inflation. Policy is countercyclical. B A
AD, b=0 and h high y
Effects of negative supply. A trade-off between inflation and y stabilization.