Suppose that you are working as an economicpolicy maker.?

The economy is at eqquilirium with P=100 and Q=3000=Potential GDP.You do not want to acoomodate inflation that is you want to keep prices absolutely stable at P=100,no matter what happens to out put.You can use monetary and fiscal policy to affect aggregate supply in short run.How wouldresponed to:
1.A surprise increase in investment spending?
2.A sharp increase in food-prices?
3.A productivity decline that reduces potential out put?
4.A sharp decrease in net exports?

Answer:
The first thing to realize is that monetary and fiscal policy affect aggregate demand. So, this will affect how you react. The next step is to figure out how each of the above surprises affects either aggregate supply or aggregate demand. In particular, how do they shift these curves? Once you have determined that, your policy responses should be clear.

Good luck!

Are you saying that you can't use monetary and fiscal policy to affect aggregate demand, only aggregate supply? If so, that makes the questions more difficult and I'll need to know your utility function, budget constraint, and credit card number.

1. If we don´t expect higher consumption, public or private I´d increase interest rates a bit to discourage investment.
2. We have to find out the real cause of this increase, bad crops, increase of the price of inputs etc. Imports and lower taxes would be recommended.
3. Higher wages for high productive workers and loans at low rates to improve productivity.
4. I´d sell dollars in the monetary market and find new markets.

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Suppose that you are working as an economicpolicy maker.?

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