Expected inflation is 1.5%. The economy is initially in macroeconomic equilibrium with a real interest rate of 3% and an output gap of 0%. That is, the economy is operating at its potential. Using the Fed model linking the IS-MP framework with the Phillips curve, draw a graph showing the effect of the following shock: A severe recession impacts most of Western Europe, where several of the US' most important trade partners are located. Your graph should clearly indicate the conditions both before and after the shock.

Expected inflation is 1.5%. The economy is initially in macroeconomic equilibrium with a real interest rate of 3% and an output gap of 0%. That is, the economy is operating at its potential. Using the Fed model linking the IS-MP framework with the Phillips curve, draw a graph showing the effect of the following shock: A severe recession impacts most of Western Europe, where several of the US' most important trade partners are located. Your graph should clearly indicate the conditions both before and after the shock.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

If a recessionary gap occurs in the short run, then in the long run a new equilibrium arises when input prices and expectations adjust downward, causing the short-run aggregate supply curve to shift downward and to the right and pushing equilibrium real GDP per year back to its long-run value. The Federal Reserve can eliminate a recessionary gap in the short run by undertaking a policy action that increases aggregate demand. Which of the following is one monetary policy action that could eliminate the recessionary gap in the short run? A. The Fed can increase the money supply through an open market purchase of Treasury securities. B. The Fed can lower taxes. C. The Fed can increase the money supply through an open market sale of Treasury securities. D. The Fed can decrease the money supply through an open market purchase of Treasury securities.
20) Use a graph to show the differences in the central bank reaction function if the Fed is more tolerant or less tolerant of deviations from inflation in the short run. 21) For each of the following scenarios, state the short-run effect on the AD curve. a. The price level decreases. b. The target inflation rate increases. c. The U.S. dollar falls in value relative to other currencies. d. Government spending increases. e. The Fed becomes more tolerant of deviations from the target inflation rate. 22) Explain why some shifts to the aggregate demand curve are temporary and why some are permanent.
Assume that the housing market is in equilibrium in year 1. In year 2, the mortgage rate that banks charge consumers increases, but producers are not affected. Which of the following is most likely to be the equilibrium change? a The equilibrium will be at point C before the change in expectations and point A after the change b The equilibrium will be at point A before the change in expectations and point B after the change c The equilibrium will be at point A before the change in expectations and point C after the change d The equilibrium will be at point E before the change in expectations and point C after the change
What is the fundamental tradeoff faced by The Fed when responding to a negative real shock? (Three sentences or less)
Assume that the United States economy is currently in a recession in a short-run equilibrium. Draw a correctly labeled graph of the short-run and long-run Phillips curves. Use the letter X to label a point to represent the current state of the economy in recession.
Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility.Using a graph of aggregate demand and supply explain (a long explanation) how the credibility of each country’s central bank affect economic outcomes, if both countries are hit with the same b) negative temporary aggregate supply shock?
Which of the following best describes policy makers implementing a Hawk Policy? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a responding to a negative aggregate supply shock by selling bonds responding to a negative aggregate supply shock by buying bonds responding to a negative aggregate demand shock by selling bonds d responding to a negative aggregate demand shock by buying bonds
Suppose the government decides to decrease government expenditures as a means of cutting the existing government budget deficit. Using a graph of aggregate demand and supply, show the effects of such a decision on the economy in the short run. Describe the effects on inflation and output. What will be the effect on the real interest rate, the inflation rate, and the output level if the Bank of Canada decides to stabilize the inflation rate?
According to the rational expectations model, how would an announcement of expansionary monetary policy affect aggregate output? a) It would decrease aggregate output. b) It would increase aggregate output in both the short run and the long run. c) It would increase aggregate output in the short run. d) It would have no effect on aggregate output.
1. Based on the most recent announcement made by the RBA Governor (see the RBA Statement on the Monetary Policy Decision for May 2023 below), identify what type of monetary policy did the RBA implement in this announcement? Which part of the AD-AS model is this policy aiming to shift and in what direction? What does the RBA’s monetary policy decision tell us about which phase of the business cycle we are currently in, and which economic indicator the RBA is most concerned about? (3-4 sentences) 2. In its announcement, the RBA Governor refers to “the importance of returning inflation to target.” As part of your Policy Brief, explain what is meant by the inflation target and how does an inflation target contribute to good economic management? Based on the news updates that we discussed in our lectures and tutorials throughout this course, what are some factors that are currently contributing to inflationary pressures in Australia and globally, and which part of the AD-AS model are…
As per the additional reading “What should be the Fed’s response to Stagflation”, all the following statements are true EXCEPT Group of answer choices The risks of stagflation are real. The Fed should try and taper its balance sheet first and then raise the interest rate. The Federal Reserve (Fed) should raise the interest rates immediately. The Fed needs to have a more meaningful monetary tightening.
If there is a temporary adverse supply shock then the short-run Phillips curve shifts to the A) left. it remains to the left if the central bank pursues expansionary monetary policy B) right. it remains to the right regardless of monetary policy C) right. it remains to the right if the central bank pursues expansionary monetary policy D) left. it remains to the left regardless of monetary policy