Suppose the Fed fully
accommodate a price shock, shifting out the aggregate demand curve
until aggregate demand equals Y* at the higher price level. The
behavior of income and the price level are given by the following
Assuming that aggregate
demand is given by the usual relationship, which of the following
equations must describe the adjustment of prices?
Assume now that there is the
same policy response but prices are governed by the other equation.
Describe the path followed by output and prices