Problem
Suppose output is initially equal to potential GDP. Now assume the Fed shifts its policy rule by raising interest rates at each rate of inflation. How does this affect the ADI curve? What happens in the short run to equilibrium output? To unemployment? Over time, will inflation tend to rise or to fall? Explain how the adjustment of inflation works to return the output gap to zero. What happens to the real interest rate?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.