Consider the economy represented in the graph. This economy has been hit by a positive demand shock (represented by point B). Before the shock the economy was at equilibrium (represented by point A). The top graph represents the equilibrium in the goods market, the labour market is depicted in the middle graph, and the bottom graph shows the central bank's monetary rule.
Consider the economy represented in the graph. This economy has been hit by a positive demand shock (represented by point B). Before the shock the economy was at equilibrium (represented by point A). The top graph represents the equilibrium in the goods market, the labour market is depicted in the middle graph, and the bottom graph shows the central bank's monetary rule.
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter24: The Aggregate Demand/aggregate Supply Model
Section: Chapter Questions
Problem 3SCQ: The short run aggregate supply curve was constructed assuming that as the price of outputs...
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![Consider the economy represented in the graph. This economy has been hit by a positive demand shock (represented by point B). Before the shock the economy was at equilibrium (represented
by point A). The top graph represents the equilibrium in the goods market, the labour market is depicted in the middle graph, and the bottom graph shows the central bank's monetary rule.
r, real interest
rate
Is
w, real
wages
We
n, inflation
TL1
IIT
A
ye
B
B
B
y₁
IS
MR
IS'
y, output
WS
PS
N, employment
PC
y, output
Select all the CORRECT statements:
The Central Bank will wait up to two periods to understand if the shock is permanent or temporary, before adjusting interest rate.
If the demand shock is temporary, once the adjustment process guided by the central bank finishes, the economy will be back at the same output (Yt=ye) and interest rate (rt = rs).
At point B there is a positive bargaining gap between the WS-PS which puts pressure on prices to increase.
The slope of the Phillips curve (PC) does not matter for the central bank's decision of how much to change interest rate.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F6d94b61e-9088-4b29-bb35-c4fc8a801d78%2Fb8b9915d-3c30-4048-b7dc-7d40bc952b2f%2F8p1xp4_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Consider the economy represented in the graph. This economy has been hit by a positive demand shock (represented by point B). Before the shock the economy was at equilibrium (represented
by point A). The top graph represents the equilibrium in the goods market, the labour market is depicted in the middle graph, and the bottom graph shows the central bank's monetary rule.
r, real interest
rate
Is
w, real
wages
We
n, inflation
TL1
IIT
A
ye
B
B
B
y₁
IS
MR
IS'
y, output
WS
PS
N, employment
PC
y, output
Select all the CORRECT statements:
The Central Bank will wait up to two periods to understand if the shock is permanent or temporary, before adjusting interest rate.
If the demand shock is temporary, once the adjustment process guided by the central bank finishes, the economy will be back at the same output (Yt=ye) and interest rate (rt = rs).
At point B there is a positive bargaining gap between the WS-PS which puts pressure on prices to increase.
The slope of the Phillips curve (PC) does not matter for the central bank's decision of how much to change interest rate.
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