III. Consider the following Rational Expectations stochastic macro model. All relationships are in log linear terms. (1) Aggregate Supply Equation: y, = y₁ + α[p₁ - E₁₁P₁ ]+z,, where z, is the supply shock with E₁-12, = 0, E₁₁ (22)= var₁ (2₁) = σ? (2) Aggregate Demand Equation: y₁= Bo + B₁(m, -P₁)+u,,
III. Consider the following Rational Expectations stochastic macro model. All relationships are in log linear terms. (1) Aggregate Supply Equation: y, = y₁ + α[p₁ - E₁₁P₁ ]+z,, where z, is the supply shock with E₁-12, = 0, E₁₁ (22)= var₁ (2₁) = σ? (2) Aggregate Demand Equation: y₁= Bo + B₁(m, -P₁)+u,,
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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3.
Is the above model consistent with the policy ineffectiveness proposition? How does the policy implication of the model differ from that of the traditional static AD-AS model with exogenous expectations or adaptive expectations? Explain.
![III. Consider the following Rational Expectations stochastic macro model. All relationships
are in log linear terms.
(1) Aggregate Supply Equation: y, = yo + «[p, – EP,]+ z,,
where z is the supply shock with E,-17, = 0, E1(z;)= var, (z,) = o?
(2) Aggregate Demand Equation: y, = Bo+ Bi(m, – p.) + u,,
where the random demand disturbance u, is autocorrelated:
u, = pu, + E,, where &t is the white noise with E,-8, = 0, E,-1(ɛ;)= var_1 (&,) = o; .
(3) Nominal Money Supply: m, = 7o + 7im,-1 +V,, where Y0-71 are parameters and v, is
unanticipated policy shock with EV, = 0, E,1(v})= var,-1 (v,) = o;,
(4) Rational Expectations: E-P,= the mathematical expectation of pt conditional on time t-1
information.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0d155242-a82a-4aa8-9f20-8a7c4a02af2d%2F733a7b74-f392-4281-aa30-95ed8abcb2dc%2Fq4ohd4_processed.png&w=3840&q=75)
Transcribed Image Text:III. Consider the following Rational Expectations stochastic macro model. All relationships
are in log linear terms.
(1) Aggregate Supply Equation: y, = yo + «[p, – EP,]+ z,,
where z is the supply shock with E,-17, = 0, E1(z;)= var, (z,) = o?
(2) Aggregate Demand Equation: y, = Bo+ Bi(m, – p.) + u,,
where the random demand disturbance u, is autocorrelated:
u, = pu, + E,, where &t is the white noise with E,-8, = 0, E,-1(ɛ;)= var_1 (&,) = o; .
(3) Nominal Money Supply: m, = 7o + 7im,-1 +V,, where Y0-71 are parameters and v, is
unanticipated policy shock with EV, = 0, E,1(v})= var,-1 (v,) = o;,
(4) Rational Expectations: E-P,= the mathematical expectation of pt conditional on time t-1
information.
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