If policymakers attempt to offset a favorable inflation shock with monetary , the resulting long-run equilibrium will be at inflation rate compared to allowing the self-correcting mechanism return the economy to potential output.

1. Easing

2. A higher

Explanation:

An adverse inflation shock when modeled is the upward shift of the Short run aggregate supply curve, this brings about higher inflation and causes a lowering of output.

The self-correcting mechanism of the economy will cause inflation to decrease gradually until the economy is back in long-run equilibrium at the original level of inflation.

If there is an intervention with monetary easing, aggregate demand will shift forward and a long-run equilibrium will be established where inflation remains at the higher level.

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