a) Determine the cyclical behaviour of the key macroeconomic variables of the model! b) How do the political business cycles depend on the assumption about the expect- ations of the electorate? What role plays the parameter a in the duration of the cycles?
a) Determine the cyclical behaviour of the key macroeconomic variables of the model! b) How do the political business cycles depend on the assumption about the expect- ations of the electorate? What role plays the parameter a in the duration of the cycles?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Answer all questions otherwise don't solve it.
![Consider a society which consists of identical voters interested in having low unem-
ployment rate U, and low divergence of inflation from a given target rate (for simpli-
city assumed to equal zero). Voters' dissatisfaction in any period t can be represented
by the following loss function:
0
L₁ = U₁ + — (Mt+1 − ñ)²,
where is the relative weight the voters put on the inflation deviations relative to
unemployment. The only objective of the policy-maker is to maximize the probability
of his re-election. We assume that the voting is retrospective so that the policy-maker
maximizes the number of votes in the election at the end of period t which is a function
of voters' well-being over an exogenously given length of time of 4 periods between
elections:
[]+
B²L₁-s +6,
N₁ = N
where N'(-) < 0 holds, 0 <ß < 1 is the discount factor and e is a zero-mean random
term. The structure of the economy is summarized by a Phillips curve:
U₁ = -(μ₁ −μ₂²),
e
where μ, is the money growth rate and μ, denotes the private expectations of this rate.
Voters have adaptive expectations so that the expected money growth is a weighted
average of the observed money growth in the past two periods:
μ₁² = (1-α)μ₁-1 + aμ₁-2²
We assume that the money growth affects the inflation with a lag of one period:
πt = Mt-1.
a) Determine the cyclical behaviour of the key macroeconomic variables of the model!
b) How do the political business cycles depend on the assumption about the expect-
ations of the electorate? What role plays the parameter a in the duration of the
cycles?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fff812836-7460-4427-aec4-57edfa294a49%2Fc442bac3-b1a1-4b39-9293-b95a3797fe41%2Fpcz76gb_processed.png&w=3840&q=75)
Transcribed Image Text:Consider a society which consists of identical voters interested in having low unem-
ployment rate U, and low divergence of inflation from a given target rate (for simpli-
city assumed to equal zero). Voters' dissatisfaction in any period t can be represented
by the following loss function:
0
L₁ = U₁ + — (Mt+1 − ñ)²,
where is the relative weight the voters put on the inflation deviations relative to
unemployment. The only objective of the policy-maker is to maximize the probability
of his re-election. We assume that the voting is retrospective so that the policy-maker
maximizes the number of votes in the election at the end of period t which is a function
of voters' well-being over an exogenously given length of time of 4 periods between
elections:
[]+
B²L₁-s +6,
N₁ = N
where N'(-) < 0 holds, 0 <ß < 1 is the discount factor and e is a zero-mean random
term. The structure of the economy is summarized by a Phillips curve:
U₁ = -(μ₁ −μ₂²),
e
where μ, is the money growth rate and μ, denotes the private expectations of this rate.
Voters have adaptive expectations so that the expected money growth is a weighted
average of the observed money growth in the past two periods:
μ₁² = (1-α)μ₁-1 + aμ₁-2²
We assume that the money growth affects the inflation with a lag of one period:
πt = Mt-1.
a) Determine the cyclical behaviour of the key macroeconomic variables of the model!
b) How do the political business cycles depend on the assumption about the expect-
ations of the electorate? What role plays the parameter a in the duration of the
cycles?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education