What are demand shocks?
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What can cause aggregate demand shocks?
Our monetary policy rule responds only to shocks to the inflation rate. we saw in section 13.5 that this means that aggregate demand shocks can cause the economy undergo a "boom-recession" cycle. Create your own monetary policy rule that would insulate the aggregate economy completely from aggregate demand shocks---so that neither inflation nor output would change if an aggregate demand shock hit the economy. Explain why your policy works.