Using what you have studied in the topic of the policy influence in AS/AD (Chapter 34), answer the following using the AS/AD diagram:
a) Consider a positive AD shock hitting the economy. Draw an AS/AD diagram and show both the short-run and long-run effects of the shock. And then, explain step by step the adjustment process after the shock, i.e. both the short run deviation from LRAS and the self-correction back to LRAS assuming policymakers do NOT respond to the shock
b) Now re-consider part a), assuming that the policymakers (monetary, fiscal, or both) respond optimally to the shock in order to stabilise the economy. Show what happens in AS/AD diagram and explain the adjustment process step by step
c) In part b), can the policies reduce fluctuations of the economy compared to part a)? Discuss.
d) Re-do part a). (i.e. without policy responses), assuming a negative SRAS shock
e) Re-do part b). and e), which shocks are easier to stabilise: AD or ARAS? Which one and why? Discuss.