Suppose that there is an "inflation scare," that is, suppose market participants increase their expectations of future inflation.

With the help of AD-AS diagrams, explain the effects of an increase in the expected rate of inflation on the equilibrium value of the price level and real GDP if:

(1) The U.S. economy is initially at full employment.

(2) The U.S. economy is initially below full employment.

In your explanations, be clear about the interconnections among markets.

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