Consider the following model, characterized by an IS curvean inflation equation,Yt = 2t - btrt,1Tt = Tt1 trệtand a modified interest rate rule that has the Fed respond to both inflation and output:rt = m(πt - Ft) + nyt1. Derive the AD curve in this economy: an expression relating the amount of output consumersdemand as a function of interest rates in the economy.2. Draw the AD curve for an aggressive Fed (high n) and another one for a passive Fed (low n)in the same diagram.3. Show how output and inflation respond over time to a negative demand shock at as a functionof how aggressive the Fed is. Use both AD-AS diagrams (one for each Fed type) and alsoplot the time paths of output and inflation.

yt=Zt-btrt--IS curveZt-- autonomous demandbt-- sensitivity parameter to rπt=πt-1+kyt--…

Answered: Consider the following model,…

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Consider the following model, characterized by an IS curve Yt=Zt-btrt, 1

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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