This is exactly the same as the example used in class in which the government increased defense expenditures. In this case, though, the ADI curve shifts to the right due to the increased highway construction. Inflation remains fixed due to sticky prices. Inflation begins to rise as illustrated by an upward shift in the PA line. This means that the Fed will raise interest rates, consistent with its policy rule.
Interest rates are higher than baseline.
Price shocks and the Fed. Since GDP is below potential GDP, the PA line will adjust do wnward and move the economy back to potential GDP along the ADI curve. Only nominal GDP rises du e to the increase in prices. Real GDP remains unchanged and there is no long run adjustment. More ADI and PA stuff.