Starting with the economy in long-run equilibrium, use the aggregate demand-aggregate supply framework to illustrate what would happen to inflation and output in the short run if there were a rise in consumer confidence in the economy. Assuming the central bank takes no action, what would happen to inflation and output in the long run?

Also, assuming the central bank maintains its existing inflation target, illustrate the impact on the monetary policy reaction function and on equilibrium inflation and output both in the short run and in the long run.