Assume an open economy with a fixed exchange rate and a credible inflation target that is in a recessionary gap, with inflation that is higher than the inflation target. what could have caused this situation? what type of policy can be used to stabilise the economy in this situation? How are the curves in the AD-AS model and Phillips model affected by this policy? Describe the effects on inflation, inflation expectations, output and unemployment. Breifly discuss why policy may or may not be preferable to self correction in this specific situation.

Assume an open economy with a fixed exchange rate and a credible inflation target that is in a recessionary gap, with inflation that is higher than the inflation target. what could have caused this situation? what type of policy can be used to stabilise the economy in this situation? How are the curves in the AD-AS model and Phillips model affected by this policy? Describe the effects on inflation, inflation expectations, output and unemployment. Breifly discuss why policy may or may not be preferable to self correction in this specific situation.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Assume an open economy with a fixed
exchange rate and a credible inflation target
that is in a recessionary gap, with inflation
that is higher than the inflation target.
what could have caused this situation?
what type of policy can be used to stabilise
the economy in this situation? How are the
curves in the AD-AS model and Phillips model
affected by this policy? Describe the effects
on inflation, inflation expectations, output and
unemployment.
Breifly discuss why policy may or may not be
preferable to self correction in this specific
situation.

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Step 3: Explain the appropriate economic policy

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Step 4: Explain what will happen to the AD-AS and the Phillips curve

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Step 5: Analyze what will happen to inflation, inflation expectations, output and unemployment

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Step 6: Discuss why policy may or may not be preferable to self correction in this specific situation.

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