(Solved): 4 Question Consider the AS-AD model where the (very) short-run AS curve is completely hor- izontal. ...

4 Question Consider the AS-AD model where the (very) short-run AS curve is completely hor- izontal. For each of the following, use an AD-AS diagram to show the short-run and long-run effects on output and inflation. Assume the economy starts in long-run equilibrium. a) An increase in consumer confidence that leads to higher consumption spending b) An easing of monetary policy by the Reserve Bank (a downward shift in the policy reaction function) c) A sharp drop in oil prices You are a staff economist with the Reserve Bank of Australia. The chairperson says to you, "The rate of change in inflation is too high, and I don't think the Phillips curve is very steep. What should we do to reduce these inflationary increases?" You respond with, a) "Because the Phillips curve is relatively flat, we need to increase interest rates a lot, as the change in inflation is not very responsive to changes in output." (Code 20251) b) "Because the Phillips curve is relatively flat, we need to decrease interest rates a lot, as the change in inflation is not very responsive to changes in output." (Code 20253) c) "Because the Phillips curve is relatively flat, we need to increase interest rates only a little, as the change in inflation is very responsive to changes in output." (Code 26116) d) "Because the Phillips curve is relatively flat, we need to increase interest rates only a little, as the change in inflation is not very responsive to changes in output." (Code 50212) e) "Because the Phillips curve is relatively flat, we can do nothing to interest rates, as the change in inflation does not respond to changes in output." (Code 50262)