Problem 4 The dynamic aggregate demand curve is given by: Y₁ =Y-2 (₁-¹)+ ε₁ The dynamic aggregate supply curve is given

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Problem 4 The dynamic aggregate demand curve is given by: Y₁ =Y-2 (₁-¹)+ ε₁ The dynamic aggregate supply curve is given by: ,,, +4(Y, −Y) + 2v₁ a) Due to a shock, an economy that is initially in the long run equilibrium experiences an increase in inflation by 2 percentage points above the central bank's target. Find out whether the shock arises from the demand or the supply side (you can use graphs!) and calculate the value of the shock. b) Use the dynamic AD-AS model (the equations above can be used as an example) to EXPLAIN, in words and graphically, the short and long-run consequences of an inflow into a country of foreign physical capital.