Question: Use the AD/AS model to answer the following. You must label and explain all axis and relevant points in the graph.
a. Demonstrate graphically what happens when the central bank increases their long run target for inflation (π‾). Assume the economy starts off producing at potential output levels and the target inflation rate is raised from 2 percent to 3 percent.
b. Fully explain the chain of events that occur as a result of the policy as shown in the graph in part a)
c. Does this influence the average standard of living in this economy in the long run? Explain
d. Explain why a central bank might choose this policy. Be sure to explain what problem they might have with the original target inflation rate and WHY it is a problem.