Consider the expenditure shock in figure the ae curve, Ask an Expert

Finance

Consider the expenditure shock in Figure: the AE curve shifts to the right in 2020 and returns to its initial position in 2021.

Suppose the central bank anticipates the shock: in 2019, it knows what will happen in the following two years.

Assuming lags in the AE and Phillips curves, can the central bank keep output and inflation constant? If it can, explain how; if it can't, explain why not.

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