Suppose the economy is in a long-run equilibrium when a positive demand shock occurs. On the graphs above, show what happens to bring the economy back to long-run equilibrium, assuming that there is no policy response

In words, describe how the graph would be different, if policy makers did intervene.

The graphs should be similar to Fig. 13.2, with AD shifting right and AS shifting up. If there is a policy response, the MP curve shifts up and AD shifts back to the left. There is no shift of AS, so inflation returns to its original rate.