Put yourself in the shoes of an economic policymaker. The economy is in equilibrium with P =100 and Q=3000 potential GDP. You refuse to “accommodate” inflation; that is, you want to keep prices absolutely stable at P=100, no matter what happens to output. You can use monetary and fiscal policies to affect aggregate demand, but you cannot affect aggregate supply in the short run. How would you respond to:
a. A surprise increase in investment spending
b. A sharp food-price increase following catastrophic flooding of the Mississippi River
c. A productivity decline that reduces potential output
d. A sharp decrease in net exports that followed a deep depression in East Asia