Plot the above AD-AS curves on the (Y, T) diagram. Describe the slopes of both the AD curve and the AS curve. b. If the economy is currently at its long-run trend, what should be the equilibrium output? What is the equilibrium inflation rate in this economy? What should be the equilibrium expected inflation rate in this economy? c. Assume that expected inflation rate is constant at 5 percent. What happens when the oil price increases by 5 percent (v = 0.05)? What is the equilibrium level of output? What is the equilibrium level of inflation? d. Assume that expected inflation rate is constant at 5 percent. What happens for today and 1 period after when money supply increases by 1 (m = 1)? (current period and the long-run period) What is the equilibrium level of output today and 1 period after? What is the equilibrium level of inflation today and 1 period after?

Plot the above AD-AS curves on the (Y, T) diagram. Describe the slopes of both the AD curve and the AS curve. b. If the economy is currently at its long-run trend, what should be the equilibrium output? What is the equilibrium inflation rate in this economy? What should be the equilibrium expected inflation rate in this economy? c. Assume that expected inflation rate is constant at 5 percent. What happens when the oil price increases by 5 percent (v = 0.05)? What is the equilibrium level of output? What is the equilibrium level of inflation? d. Assume that expected inflation rate is constant at 5 percent. What happens for today and 1 period after when money supply increases by 1 (m = 1)? (current period and the long-run period) What is the equilibrium level of output today and 1 period after? What is the equilibrium level of inflation today and 1 period after?

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

Consider the classical AS-AD model with misperceptions. Assume that the economy is initially at its general equilibrium. Now, suppose the central bank considers an increase in the nominal money supply that is not anticipated by households or firms. a. How does the misperception theory work? b. Which of the three markets is first affected (labor, goods, or asset market)? Explain and show graphically how this market is affected by an unanticipated increase in the nominal money supply. c. Use the classical version of the AS-AD model with misperceptions to explain and to show graphically how an unanticipated increase in the nominal money supply affects the short-run equilibrium. d. Use the classical version of the AS-AD model with misperceptions to explain and to show graphically how an unanticipated increase in the nominal money supply affects the long-run (general) equilibrium.
1. Imagine an economy, where the SRAS in terms of inflation is given by II=5+Y, where Y is output. Imagine that the long run AS curve is given by Y=2. (25 marks) a) Give the equation of the AD curve (you can take liberties), if we assume that initially, the economy is at its long-run equilibrium. Justify. b) Imagine that your chosen AD curve's intercept goes up by one unit due to an expansionary monetary policy. What will be the new final equilibrium after this change? Justify. c) What will be the equilibrium after two periods of adjustment? Justify. d) Assume that before all the changes in the economy, in the initial, long-run equilibrium, the interest rate was 4 percent. Give an IS and an LM curve that are compatible with this initial equilibrium. Justify. e) What are the IS and LM curves going to be at the very end of the adjustment process, i.e., in the new long run equilibrium? Justify.
The economy of Winterspring is currently in an equilibrium depicted by point E, on the graph. Economy of Winterspring Now suppose that there is a demand shock in the economy and the AD curve shifts from AD, to AD,, as shown by the graph. 2400- 2.200- AS Suppose that there is no monetary validation. 2.000- 1.800- Using the point drawing tool, show the short-run equilibrium that the economy will move into in this case. Label this point E,. A 1,600- 1400 Carclully follow the instructions above, and only draw the required objects. 1.200 900 600 AD 3,000 5,000 7.c00 9.c00 Real GDP (Y) 1,000 11,000 Price Level (P)
For Shock C: Suppose the economy starts in the long run equilibrium. Illustrate changes that the shock will cause in the short run (using AD-SRAS). Explain why each curve shifts. Determine how the price level and output will be affected in the short run. Mark the output gap on the diagram. Is the output gap positive or negative? Is the economy is booming, or is it in a recession? On the same diagram illustrate how the economy will adjust to the shock in the long run and explain the mechanism. Determine how the price level and output will be affected in the long run. C. Firms expect an economic boom in the coming years As a result of this shock, in the short run the (SRAS Curve/AD Curve) will shift? In consequence, in the short run prices and output will? In the short run, there will be a ? (negative/postive) output gap,which means there will be a ? (boom/recession) As time passes, because of high unemployment the wages in the economy will? (decrease/increase) As a result,…
Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not?
1. Imagine an economy, where the SRAS in terms of inflation is given by II=5+Y, where Y is output. Imagine that the long run AS curve is given by Y=2. (25 marks) a) Give the equation of the AD curve (you can take liberties), if we assume that initially, the economy is at its long-run equilibrium. Justify. b) Imagine that your chosen AD curve's intercept goes up by one unit due to an expansionary monetary policy. What will be the new final equilibrium after this change? Justify. c) What will be the equilibrium after two periods of adjustment? Justify. d) Assume that before all the changes in the economy, in the initial, long-run equilibrium, the interest rate was 4 percent. Give an IS and an LM curve that are compatible with this initial equilibrium. Justify. e) What are the IS and LM curves going to be at the very end of the adjustment process, i.e., in the new long run equilibrium? Justify.
In the dynamic model of AD-AS in the diagram to the right, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in OA. short term interest rates higher than what would occur if no policy had been pursued. OB. unemployment rates higher than what would occur if no policy had been pursued. OC. real GDP lower than what would occur if no policy had been pursued. OD. inflation higher than what would occur if no policy had been pursued. MIDD Price level 102 100 LRAS, A 10 Real GDP B 00 LRAS AD. 10.8 11 SRAS₁ SRAS, AD₂
Consider the AD-AS model: Y = Y* ay (π = π*) + ED ㅠ π = π² + 08 (Y-Y*) + €s Suppose the parameter values are a = = 0.02 0.5, y = 2, p = 0.5, B = 2 with inflation target * and natural output normalized to Y* = 1. Suppose the economy begins in an initial long run equilibrium.
For example, an increase in the money supply,(NORMINAL, REAL) a variable, will cause the price level, a (NORMINAL, REAL) variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a (REAL, NORMINAL) variable. The notion that an increase in the quantity of money will impact the price level but not the output level is known as (MONETARY, THE QUANITY, PRICE) .
Use shifts of the AD and AS curves to explain (a) the U.S. experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s and (b) how a strong negative wealth effect from, say, a precipitous drop in the stock market could cause a recession even though productivity is surging.