Consider the short run model of Chapter 13. The IS curve is Long Question 2 of 2: given by Y = ā - b(R -F) (7) where Y, is the short run output, R, is the real interest rate, i is the long-run interest rate (or the marginal product of capital). The term a is the aggregate demand parameter. Also, b captures how responsive investment is to changes in the real interest rate. Moreover, the Phillips curve is given by ThE = Tt-1+ vY + ō (8) The term v captures changes in inflation as a response to changes in the current economic conditions, and o captures shocks in the supply side of the economy. The monetary authority in this economy wishes to keep inflation at a certain "target" level ī. Whenever there is discrepancy between current inflation and target inflation, the central bank responds by changing the interest rate according to the rule R-7 = m(T; - ī) (9) where m is a positive parameter (i.e., m > 0) that captures how aggressive the monetary policy is. 1 of 5) Derive the Aggregate Demand (AD) and Aggregate Supply (AS) curves for this economy. 2 of 5) Draw the AD and AS curves in the same graph and in the steady state. A steady state is a situation where no supply or demand shocks occur, and inflation does not change over time, that is, T = Tt-1 for all t. 3 of 5) Now assume that the monetary authority has a different policy rule. Assume for the moment that m' = 1.5m. Re-derive the AD and AS curves and graph them. Give an interpretation of the change in the monetary policy rule. 4 of 5) Now assume that the inflation target n = 2.5 and also assume that inflation falls unexpectedly from its target so that o = -3. Show graphically what happens in the AS-AD graph in the first period both when the monetary policy rule is Re -F = m(n, – ī) and when it is R, - f = m'(T, – ī). When is the impact on output larger? Why? ( %3D 5 of 5) Show how the economy moves back to steady state and explain the transition dynamics in words.
Consider the short run model of Chapter 13. The IS curve is Long Question 2 of 2: given by Y = ā - b(R -F) (7) where Y, is the short run output, R, is the real interest rate, i is the long-run interest rate (or the marginal product of capital). The term a is the aggregate demand parameter. Also, b captures how responsive investment is to changes in the real interest rate. Moreover, the Phillips curve is given by ThE = Tt-1+ vY + ō (8) The term v captures changes in inflation as a response to changes in the current economic conditions, and o captures shocks in the supply side of the economy. The monetary authority in this economy wishes to keep inflation at a certain "target" level ī. Whenever there is discrepancy between current inflation and target inflation, the central bank responds by changing the interest rate according to the rule R-7 = m(T; - ī) (9) where m is a positive parameter (i.e., m > 0) that captures how aggressive the monetary policy is. 1 of 5) Derive the Aggregate Demand (AD) and Aggregate Supply (AS) curves for this economy. 2 of 5) Draw the AD and AS curves in the same graph and in the steady state. A steady state is a situation where no supply or demand shocks occur, and inflation does not change over time, that is, T = Tt-1 for all t. 3 of 5) Now assume that the monetary authority has a different policy rule. Assume for the moment that m' = 1.5m. Re-derive the AD and AS curves and graph them. Give an interpretation of the change in the monetary policy rule. 4 of 5) Now assume that the inflation target n = 2.5 and also assume that inflation falls unexpectedly from its target so that o = -3. Show graphically what happens in the AS-AD graph in the first period both when the monetary policy rule is Re -F = m(n, – ī) and when it is R, - f = m'(T, – ī). When is the impact on output larger? Why? ( %3D 5 of 5) Show how the economy moves back to steady state and explain the transition dynamics in words.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:Long Question 2 of 2:
given by
- Consider the short run model of Chapter 13. The IS curve is
Ỹ, = ā – b(R, –7)
(7)
where Y, is the short run output, R, is the real interest rate, ř is the long-run interest rate (or the
marginal product of capital). The term ā is the aggregate demand parameter. Also, b captures
how responsive investment is to changes in the real interest rate.
Moreover, the Phillips curve is given by
The = Tt-1 + vY; + ō (8)
The term v captures changes in inflation as a response to changes in the current economic
conditions, and ō captures shocks in the supply side of the economy. The monetary authority in
this economy wishes to keep inflation at a certain "target" level ī. Whenever there is discrepancy
between current inflation and target inflation, the central bank responds by changing the interest rate
according to the rule
Rt -ř = m(T; – ñī) (9)
where m is a positive parameter (i.e., ñ > 0) that captures how aggressive the monetary policy is.
1
1 of 5) Derive the Aggregate Demand (AD) and Aggregate Supply (AS) curves for this economy.
2 of 5) Draw the AD and AS curves in the same graph and in the steady state. A steady state is a
situation where no supply or demand shocks occur, and inflation does not change over time, that is,
ThE = Tt-1 for all t.
3 of 5) Now assume that the monetary authority has a different policy rule. Assume for the moment
that m' = 1.5m. Re-derive the AD and AS curves and graph them. Give an interpretation of the
change in the monetary policy rule.
4 of 5) Now assume that the inflation target ī = 2.5 and also assume that inflation falls
unexpectedly from its target so that ō = -3. Show graphically what happens in the AS-AD graph
in the first period both when the monetary policy rule is R, –-ř = m(n, – ñ) and when it is R, –
ř = m'(T, – T). When is the impact on output larger? Why? (
5 of 5) Show how the economy moves back to steady state and explain the transition dynamics in
words.
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