Question

Draw the full short- run model graph (IS/MP and the corresponding Phillips Curve).  You must fully label all axis with both symbols and verbally. (for example (symbol) is inflation (verbal)).  Start the economy at full employment with inflation equal to the central bank target (2%) and label that point "A".

Then, assume the central bank decides to lower interest rates to boost employment.  Demonstrate how this influences the short-run model (shift appropriate curves and show a move along appropriate curves). Label the new short run equilibrium point B.  

Discuss how this will influences the output gap, unemployment, the change in inflation (is it positive or negative), AND the inflation rate itself (does it rise or fall, and how do you know). You must fully explain how interest rates cause a change in the output gap (think of what is included in the IS equation - which part responds to R?).

Are there any negative consequences to this action? Explain.

please answer the simpler as you can

Answer 1