in the Lucas Imperfect Information model, do aggregate demand shocks have real affects? Explain. What is the implication of this result for stabilisation policy?
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in the Lucas Imperfect Information model, do aggregate demand shocks have real affects? Explain. What is the implication of this result for stabilisation policy?
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- You work at the Central Bank and you are in charge of forecasting the effects of possible future shocks using the ASAD Redux model. Today, your task is to predict what will happen if the economy is subject to two consecutive shocks, namely, At time t = 1, there is a persistent positive shock on aggregate demand due to increased desired expenditures (e.g., a higher propensity to consume). At time t = 2, the Central Bank implements a permanent reduction in money supply. %3D The Central Bank wants you to forecast what will be the effects of a range of monetary contractions of different magnitude. Hence, you run six numerical simulations of the model assuming different sizes of the reduction in money supply. However, the software is faulty and some simulation results are wrong. Your computer produces six scenarios for employment (N) and price level (P), but some scenarios are clearly incorrect and inconsistent with the general predictions of the theoretical model: you need to eliminate the…Consider a standard AD-AS model. If the central bank responds relatively aggressively to inflation being below target, temporary supply shocks have relatively little effect on output. True/False. Remember to include your explanation.a) In the AS/AD macro model, starting at potential GDP explain what happens in the short run when there is an exogenous increase in government consumption spending.b) What happens in the long run?c) What would be different in the short run and the long run if the initial shock had been an exogenous increase in energy prices?d) How would the answer to a) and b) have been different if the economy had started with excess capacity (and a horizontal short-run aggregate supply curve)?e) What is meant by “the GDP gap”?
- Consider the AD-AS model. Assume the aggregate demand curve is given by Y= 8-0.5n, that the long run aggregate supply curve is given by Yp = 7, that the short run aggregate supply curve is given by n =n_expect + 0.3(Y - Yp), and that the monetary rule is given by r= 1+0.3n A) What is the economic interpretation behind the aggregate demand curve? Why is it negatively sloped? If you consider point A=(n,Y}=(3, 6.5) and point B={n,Y)=(5, 5.5), is monetary policy more expansionary in point A, in point B, or neither? Are you referring to the exogenous or to the endogenous stance of monetary policy? B) Suppose the economy is in equilibrium at the potential level of output, with inflation expectations equal to actual inflation, which equals 2%. A financial crisis hits the economy. Use the model to interpret what happens in the short run and in the long run if the central bank does not intervene exogenously with an expansionary monetary policy. C) According to the AD-AS model, what is more…Consider the AD-AS model discussed during the lectures. Assume that the aggregate demand curve is given by Y=8-0.5 π, that the long run aggregate supply curve is given by Yp=7, that the short run aggregate supply curve is given by π = π_expect + 0.3(Y-Yp), and that the monetary rule is given byr=1+0.3 π. Suppose the economy is suffering a decrease in the potential level of output, due to some ill-designed new regulation. According to the AD- AS model, what is more suitable to offset the subsequent decline in output, an expansionary monetary policy or an expansionary fiscal policy?Q: To what extent has the time-inconsistency problem influenced the formation and practical operation of macroeconomic policy?
- Consider the AD-AS model discussed during the lectures. Assume that the aggregate demand curve is given by Y = 8 - 0.5π, that the long run aggregate supply curve is given by Yp = 7, that the short run aggregate supply curve is given by π = π_expect + 0.3(Y - Yp), and that the monetary rule is given by r = 1 + 0.3π. b) Suppose the economy is in equilibrium at the potential level of output, with inflation expectations equal to actual inflation, which equals 2%. A financial crisis hits the economy. Use the model to interpret what happens in the short run and in the long run if the central bank does not intervene exogenously with an expansionary monetary policy.What is the economic justifcation for the sticky infation assumption? Whatrole does this assumption play in the short-run model?Which of the following is a statement that you would AGREE with? Explain why. Use the AD-AS model. Assume the ceteris paribus assumption holds in all cases and that the economy is initially in short run macroeconomic equilibrium. 1. We observe a decrease in the price level and a decrease in real GDP. A possible explanation is an increase in expected future income or decrease in interest rates. 2. We observe a decrease in the price level and a decrease in real GDP. A possible explanation is an expansionary monetary policy or an increase in government spending. 3. We observe an increase in the price level and an increase in real GDP. A possible explanation an increase in expected future profit or an expansionary fiscal policy.
- Consider a standard AD-AS model. An increase in the interest sensitivity of consumption and/or investment demand makes the AD curve flatter and makes inflation more responsive to supply shocks. True/False. Remember to include your explanation.Consider the AD-AS model discussed during the lectures. Assume that the aggregate demand curve is given by Y = 8 - 0.5π, that the long run aggregate supply curve is given by Yp = 7, that the short run aggregate supply curve is given by π = π_expect + 0.3(Y - Yp), and that the monetary rule is given by r = 1 + 0.3π. a) What is the economic interpretation behind the aggregate demand curve? Why is it negatively sloped? If you consider point A=(π,Y)=(3, 6.5) and point B=(π,Y)=(5, 5.5), is monetary policy more expansionary in point A, in point B, or neither? Are you referring to the exogenous or to the endogenous stance of monetary policy?Consider a standard AD-AS model. The economy is affected by the following sequence of events. In period 1 there is a shock to the economy that is temporary. In period 2, the shock ends. But having observed an inflation outcome different to the inflation target, inflation expectations change from the inflation target to a value exactly equal to the observed inflation in period 1 (that is, expectations are not `anchored’). A temporary positive demand shock would lead to output above potential in period 1, but below potential in period 2. Answer true or false. Please briefly explain your answer.
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