Draw the following four graphs with an economy experiencing an inflationary gap: money market, investment demand, aggregate demand and supply (with the LRAS), and the Phillips curve. Show what happens in the short-run on all three graphs when the central bank decreases the money supply.
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- A. What assumptions did Thomas Sargent make when he claimed that inflation is always and everywhere a fiscal phenomenon?" B. Why is it appropriate in the book's short-term model for the author to use the Phillips Curve as an Aggregate Supply curve? Does it capture the working of the labor market as well as an AS curve based, say, on sticky wages? C. Provide an example of the book's short-run model being based on "microfoundations."Suppose that the central bank has the policy "set R equal to 3 if inflation equals 2% and GAP = 0. Raise R by 0.5 points for every point of inflation above 2%. Reduce R by 0.5 points for every point that inflation falls shortof 2%. Increase R by 1 point for every percentage point of GAP, if GAP > 0. Reduce R by 1 point for every percentage point of GAP, if GAP < 0." All but one of the following is an equation that is consistent with this rule. Which is the exception? OR-3+0.5( - 2) + GAP OF-2+1.5n + GAP OF- 3+0.5(n - 2) + GAP + n R-2+n+ GAPMacro Econ
- Consider an economy that is initially in its long-run equilibrium. Suppose this economy suffers a temporary negative supply shock. If the central bank’s sole objective is to stabilize output in the short-run, then what will happen after the central bank has responded according to its objective? A. Inflation will be lower, output will back at its original level B. Inflation will be lower, output will be lower C. Inflation will be higher, output will be higher D. Inflation will be lower, output will be higher E. Inflation will be higher, output will be lower F. Inflation will be higher, output will back at its original levelExplain it using graph.If a central bank wants to counter the change in the price level caused by an adverse supply shock, it could change the money supply to shift a. aggregate demand right. b. aggregate demand left. c. aggregate supply right. d. aggregate supply left.
- The long-run Phillips curve would shift to the left if a. the money supply growth rate increased or labor markets become more flexible. b. the money supply growth rate increased but not if labor markets become more flexible. c. labor markets become more flexible but not if the money supply growth rate increased. d. None of the above is correct.Jerome Powell is attempting to lower inflation. His actions look a lot like Paul Volcker’s disinflation policy and model. Graphically illustrate this effect and explain the process. Is it possible to reduce inflation without causing a recession?In the graph, demonstrate the short-run effect of an increase in the growth rate of the money supply, assuming all else remains equal. What happens in the long run? LRAS O As expectations adjust to the increase, all curves shift back to their original locations. SRAS The SRAS curve shifts to the left, and the inflation rate increases, with no change in the growth rate. The AD curve shifts to the right, and both the real growth rate and inflation rate increase. The LRAS curve shifts to the right, and the real growth rate increases, with no change in the inflation rate. AD Real GDP growth rate Inflation rate (T)
- A movement to the right along a given short-run Phillips curve could be caused by a. contractionary monetary policy, but not an increase in the natural rate of unemployment. b. expansionary monetary policy, but not an increase in the natural rate of unemployment. c. an increase in the natural rate of unemployment or a contractionary monetary policy. d. an increase in the natural rate of unemployment or expansionary monetary policy.Monetary Policy: End of Chapter Problem 28a Central bankers must manage expectations. Suppose that inflation is running at 10% and the central banker would like to lower inflation to 2% without reducing real growth. What should the central banker tell the public? And at what level should the central banker set money growth? Adjust the graph to show how the central banker's policy will affect the economy, assuming people believe the central bank will do as it says. Label the new equilibrium with point b. Assume that velocity shocks are zero and that the potential growth rate is 3%. b. Suppose that the public does believe the central banker. What temptation might the central banker face? Label the equilibrium at which the economy will wind up if the central banker succumbs to this temptation with point c. c. If the central banker is not believed but follows the policy in part a, use point d to indicate where the economy will be. Use your answer to parts b and c to discuss the importance…Explain how a sustained increase in the growth rate of the money supply (gM↑) at a particular time (t*) can lead first to the liquidity effect, then to the nominal income effect, and finally to the inflation expectations effect. Also, explain how the interest rate changes in response to each of these effects.