A. Derive the DAD and DAS equations. Hint: For DAS, express , as a function of (Yt - Yt); for DAD, express Y, as a function of ( - ). B. Suppose the economy experiences an inflation scare: in period t, people believe that inflation in t+1 will be higher so nt> 0 (but for this period only). What happens to DAD and DAS in t? Explain what happens to output, inflation, nominal interest rate, and real interest rate. Show a graph and provide labels for equilibrium points (A, B, C, etc.) as needed.
A. Derive the DAD and DAS equations. Hint: For DAS, express , as a function of (Yt - Yt); for DAD, express Y, as a function of ( - ). B. Suppose the economy experiences an inflation scare: in period t, people believe that inflation in t+1 will be higher so nt> 0 (but for this period only). What happens to DAD and DAS in t? Explain what happens to output, inflation, nominal interest rate, and real interest rate. Show a graph and provide labels for equilibrium points (A, B, C, etc.) as needed.
Chapter14: Macroeconomic Policy: Tradeoffs, Expectations, Credibility, And Sources Of Business Cycles
Section: Chapter Questions
Problem 4E
Related questions
Question
![.) Suppose people's inflation expectations are subject to ran-
dom shocks: at time t-1, expected inflation in time t is Et-1t = πt-1+t-1 where n-1 is a
random shock with mean zero but deviates from zero when some event beyond past inflation
causes expected inflation to change. Also, Ett+1 = πt + nt.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2962072d-3853-4de7-a7f9-f8e46fcd50e2%2Fb64b15b4-05d7-4184-a018-151077150e47%2Fxmqbme_processed.jpeg&w=3840&q=75)
Transcribed Image Text:.) Suppose people's inflation expectations are subject to ran-
dom shocks: at time t-1, expected inflation in time t is Et-1t = πt-1+t-1 where n-1 is a
random shock with mean zero but deviates from zero when some event beyond past inflation
causes expected inflation to change. Also, Ett+1 = πt + nt.
![A.
Derive the DAD and DAS equations. Hint: For DAS, express as a function
of (Yt - Yt); for DAD, express Y, as a function of (-).
B.
Suppose the economy experiences an inflation scare: in period t, people believe
that inflation in t+1 will be higher so nt > 0 (but for this period only). What happens
to DAD and DAS in t? Explain what happens to output, inflation, nominal interest
rate, and real interest rate. Show a graph and provide labels for equilibrium points
(A, B, C, etc.) as needed.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2962072d-3853-4de7-a7f9-f8e46fcd50e2%2Fb64b15b4-05d7-4184-a018-151077150e47%2Fu1bq9e_processed.jpeg&w=3840&q=75)
Transcribed Image Text:A.
Derive the DAD and DAS equations. Hint: For DAS, express as a function
of (Yt - Yt); for DAD, express Y, as a function of (-).
B.
Suppose the economy experiences an inflation scare: in period t, people believe
that inflation in t+1 will be higher so nt > 0 (but for this period only). What happens
to DAD and DAS in t? Explain what happens to output, inflation, nominal interest
rate, and real interest rate. Show a graph and provide labels for equilibrium points
(A, B, C, etc.) as needed.
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