Consider the Keynesian sticky wage model. Assume that the economy is operating close to, but not at, its zero lower bound (ZLB). Discuss the following: 1. Could a negative shock to the IS curve make the ZLB bind? Explain and illustrate graph-ically. 2. Could a shock to current productivity z make the ZLB bind? What would need to be the sign of this shock to make the ZLB bind? 3. In the data, in most episodes where the ZLB binds (the US in the wake of the Great Recession, Japan during the 1990s, and the US during the Great Depression), output is low. Given this, would a supply shock as the reason for a binding ZLB make empirical sense? 4. Intuitively, explain why changes in government spending have a bigger effect on output at the ZLB than away from it.

Consider the Keynesian sticky wage model. Assume that the economy is operating close to, but not at, its zero lower bound (ZLB). Discuss the following: 1. Could a negative shock to the IS curve make the ZLB bind? Explain and illustrate graph-ically. 2. Could a shock to current productivity z make the ZLB bind? What would need to be the sign of this shock to make the ZLB bind? 3. In the data, in most episodes where the ZLB binds (the US in the wake of the Great Recession, Japan during the 1990s, and the US during the Great Depression), output is low. Given this, would a supply shock as the reason for a binding ZLB make empirical sense? 4. Intuitively, explain why changes in government spending have a bigger effect on output at the ZLB than away from it.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: Suppose, initially the Australian economy is atfull employment(in other words the economy is atthe…

A: The Australian economy is at full employment level, it means the aggregate demand (AD) and short-run…

Q: The figure below depicts the economy of Altrua, which is presently in equilibrium. Enter your…

A: Gross domestic product is the final combination of goods and services in a country. GDP is an…

Q: What did Keynes mean when he said that prices are sticky? OA. Prices are sticky because of cost-push…

A: Regarding the first question, Keynes referred to prices as "sticky" to describe their resistance to…

Q: Instructions: Use the tools provided 'AD2' and 'AS2' to plot AD and AS after the increase in…

A: In the new classical economics, there is self correcting tendency in the economy. The equilibrium…

Q: 2. The graph below shows the AD-AS model in short-run equilibrium at a price level, Po, and a level…

A: The aggregate demand in the economy shows the total spending done by various sectors of the economy…

Q: * Q₁ Real Output Refer to the diagram. Assume both upward and downward price and wage flexibility in…

A: Aggregate demand is the finished goods and services total demand that is produced in the economy. It…

Q: Suppose an economy's macro equilibrium is such that a shift in either AD or AS (or both) to the…

A: The question addresses the macroeconomic equilibrium and the potential consequences of a desired…

Q: Suppose the aggregate demand curve shifts leftward from ADO. Where does the economy move initially…

A: In the rigid Keynesian view, the aggregate demand curve shows the total spending in the economy.…

Q: Consider the figure to the right. In the absence of a change in aggregate demand, what effect does…

A: Long run supply curve (LRAS) A vertical line showing the real output of goods and services after…

Q: Describe the full employment macroeconomic equilibrium in the As-AD model. what would happen on the…

A: We will answer the first three subparts only. Please resubmit the other parts separately in case you…

Q: he graph below shows the AD-AS diagram for Spain.

A: Cyclical unemployment: It refers to the ups and downs in the overall employment due to the change in…

Q: The graph below shows an economy in long-run equilibrium. Suppose that aggregate demand unexpectedly…

A: Aggregate demand:Aggregate Demand is when the total number of consumers have the desire to buy…

Q: Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP…

A: Aggregate demand curve shows the negative relationship between the price level and output of the…

Q: Use the graph to answer the question that follows. Price Level PLO To LRAS Y₁ Real GDP SRAS AD…

A: AS-AD model: In this model we are given the aggregate demand curve which exhibits negative…

Q: Assume an economy operates in the intermediate range of its aggregate supply curve. For each of the…

A: The economies around the world operate with the motive of increasing the economic growth, and the…

Q: How does expected inflation occur? Use the graph to answer this question. Draw the AD curve when it…

A: Expected inflation is the rate at which the general level of prices for goods and services is…

Q: Use the Keynesian model to explain the procyclical behavior of employment, money, inflation, and…

A: Economic analysis is the process of assessing data and trends in order to gain a better…

Q: Suppose that in 2005, nominal wages decrease in Torania. Show how this event will change equilibrium…

A: The equilibrium output and price level are at a point where SRAS intersects with the AD curve. This…

Q: P₁ bd/ B LRAS A -SRAS₁ SRAS₂ SRAS3 AD Y Y In the graph above, assume that the economy is currently…

A: The AD curve shows the total demand for all goods and services in an economy at different price…

Q: Does interest (nominal or real) impact the consumption function in any way? According to literature…

A: Consumption is affected by interest rates negatively

Q: Price level 0 B LRAS A Y₁ SRAS, SRAS, 2 AD₁ AD₂ Real GDP Refer to Figure 13-3. Suppose the economy…

A: The price level is the average of current prices across an economy's entire range of goods and…

Q: Consider the following graph. The economy is currently at point D. Which point will the economy go…

A: Macroeconomic analysis provides a thorough picture of an economy's financial situation. It detects…

Question

Consider the Keynesian sticky wage model. Assume that the economy is operating
close to, but not at, its zero lower bound (ZLB). Discuss the following:
1. Could a negative shock to the IS curve make the ZLB bind? Explain and illustrate
graph- ically.
2. Could a shock to current productivity z make the ZLB bind? What would need to
be the sign of this shock to make the ZLB bind?
3. In the data, in most episodes where the ZLB binds (the US in the wake of the
Great Recession, Japan during the 1990s, and the US during the Great Depression),
output is low. Given this, would a supply shock as the reason for a binding ZLB make
empirical sense?
4. Intuitively, explain why changes in government spending have a bigger effect on
output at the ZLB than away from it.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Define a liquidity trap

VIEW

Step 2: Examine if a negative shock to the IS curve will make the ZLB bind

VIEW

Step 3: Examine if a shock to current productivity z will make the ZLB bind

VIEW

Step 4: Examine supply shock as the reason for a binding ZLB making empirical sense or not

VIEW

Step 5: Explain why changes in government spending have a bigger effect on output at the ZLB

VIEW

Solution

VIEW

Step by step

Solved in 6 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

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.

Similar questions

Please write on the space provided what happens to each variable -- indicate whether each variable increases, decreases, or remains unchanged. Please show in the graphs the initial equilibrium, short run equilibrium, and final long run equilibrium. If possible, please provide only two graphs, one for IS-LM and one for AD-AS that show all of the equilibrium positions Suppose the economy is initially in a long-run equilibrium. Starting from this position, assume that an exogenous shock such as the Covid 19 pandemic pushes the economy away from the equilibrium. Using the IS-LM and AD-AS framework, indicate what happens in the short run to output, unemployment, prices, interest rate, consumption, investments, and real money balances, as the economy moves from long-run equilibrium to short-run equilibrium. What economic condition is the economy in after the shock? __________________ Short-run Output ________________ Unemployment _________________ Prices…
Consider the classical AS-AD model with misperceptions. Assume that the economy is initially at its general equilibrium. Now, suppose the central bank considers an increase in the nominal money supply that is not anticipated by households or firms. b. How does the misperception theory work? c. Which of the three markets discussed in class is first affected (labor, goods, or asset market)? Explain and show graphically how this market is affected by an unanticipated increase in the nominal money supply.
The economy of Ashenvale is currently in a long-run equilibrium, depicted by point E, on the graph. Economy of Ashenvale Suppose that there is a negative AD shock to the economy and the AD curve shifts to the left, as shown by the AD, 2,400- curve on the graph. The following steps are designed so that you can explain how the economy adapts to the shock. 2,200 a. Using the point drawing tool, plot and label the new short-run equilibrium after this AD shock 2,000 1,800- AS Carefully follow the instructions above, and only draw the required object. A 1,600- E 1,400- ...... In the short run, the equilibrium price will be approximately $ and the new equilibrium quantity will be approximately 1,200- ADn 1,000 E B00 AD, 60 400 200- 6,000 Roal GDP (Y) 2,000 4 00 B,000 10,000 Price Level (P)
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
1. Imagine an economy, where the SRAS in terms of inflation is given by II=5+Y, where Y is output. Imagine that the long run AS curve is given by Y=2. (25 marks) a) Give the equation of the AD curve (you can take liberties), if we assume that initially, the economy is at its long-run equilibrium. Justify. b) Imagine that your chosen AD curve's intercept goes up by one unit due to an expansionary monetary policy. What will be the new final equilibrium after this change? Justify. c) What will be the equilibrium after two periods of adjustment? Justify. d) Assume that before all the changes in the economy, in the initial, long-run equilibrium, the interest rate was 4 percent. Give an IS and an LM curve that are compatible with this initial equilibrium. Justify. e) What are the IS and LM curves going to be at the very end of the adjustment process, i.e., in the new long run equilibrium? Justify.
Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not?
1. Imagine an economy, where the SRAS in terms of inflation is given by II=5+Y, where Y is output. Imagine that the long run AS curve is given by Y=2. (25 marks) a) Give the equation of the AD curve (you can take liberties), if we assume that initially, the economy is at its long-run equilibrium. Justify. b) Imagine that your chosen AD curve's intercept goes up by one unit due to an expansionary monetary policy. What will be the new final equilibrium after this change? Justify. c) What will be the equilibrium after two periods of adjustment? Justify. d) Assume that before all the changes in the economy, in the initial, long-run equilibrium, the interest rate was 4 percent. Give an IS and an LM curve that are compatible with this initial equilibrium. Justify. e) What are the IS and LM curves going to be at the very end of the adjustment process, i.e., in the new long run equilibrium? Justify.
When a supply-side shock is assumed to be permanent: O only the LRAS curve shifts. O only the SRAS curve shifts. O both the LRAS curve and the SRAS curve shift. O nither the LRAS curve nor the SRAS curve shifts.
Q17. Summarize the Keynesian model: A. The Keynesian model emphasizes aggregate supply by focusing on the underlying determinants of output and employment in markets, and thus tends to put more emphasis on economic growth and how labor markets work. B. The short-term Keynesian model is built on the importance of aggregate demand as a cause of business cycles and a degree of wage and price rigidity, and thus does a sound job of explaining many recessions and why cyclical unemployment rises and falls. C. The short-term Keynesian model is built on the importance of aggregate supply as a cause of business cycles and a degree of wage and price rigidity, but does a poor job of explaining many recessions and why cyclical unemployment rises and falls.
Only typed answer
Q: "Introducing Keynesian Economics" says that Keynes A: - wanted social revolution just like Marx - aggregrate supply is determined by the level of aggregrate demand, the level of aggregrate demand deternines level of employment - aggregrate supply determines aggregrate demand and the market always gives full-employment equilibrium - all of the above
Comparing ModelsWhat are the differences between our Keynesian Cross and the Macro Equilibrium (AS and AD) diagram? Which model has more to offer?