term1 Definition1term2 Definition2term3 Definition3
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Define the rs
Stabilizing rate of interest
The interest associated with equilibrium.
Medium-run equilibrium ye=> ws=ps
Inflation shock
Refers to an exogenous shift on the PC curve
.Cause
* Natural disasters:
.drought-> reduce agricultural output->raises prices
.Temporary burst of union militancy
-> pushes up wages
CB steps after an inflation shock
Step 2
.Use IS to find increase in the real r required to get back onto the MR
.Higher r dampens y and Г starts to fall
.CB gradually reduces r until y rises to ye and Г fall to ГT
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