Consider the AD/AS model built from the IS/LM, with an upward sloping SRAS. The economy was operating at full employment, but it is suddenly hit by unfavorable weather conditions, which increases the expected price level and shifts the SRAS to the left.

Assume that the government decides to keep its policy unchanged.

i. What should the central bank of this country do if its main objective is output stabilization in the short run?

ii. What are the effects of this policy on the price level, output, the real interest rate, consumption and investment?

iii. Compare the long-run equilibrium after this policy is implemented with the long-run equilibrium that this country would have reached without policy intervention. Are the price level, output, real interest rate, consumption and investment different?