Consider again the rise in consumer confidence described in given Problem. What would happen to inflation and output in the long run if the central bank remained committed to its original inflation target and responded with an immediate policy tightening? Compare the outcome to that in Problem 10 using the aggregate demand-aggregate supply framework.
Problem
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 to offset this rise in confidence, what would happen to inflation and output in the long run? What policy adjustment is the central bank undertaking?