Q1.The following question is about the basic AS-AD Model:(a) Concisely explain why the AS curve is upward-sloping.(b) Concisely explain why the AD curve is downward-sloping.(c) Suppose the economy under consideration is in an equilibrium where Y = Yn andP = p². However, the central bank decides to use expansionary monetary policy.(d) Using the AS-AD model, explain briefly the short-run and the medium-runconsequences of this policy on output and the price level.8Q2.Suppose the economy under consideration is in an equilibrium where and Y =Y" and P=Pe.However, the central bank decides to use expansionary monetary policy. Using the AS-ADand the IS-LM model respectively, explain in detail the short-run and the medium-runconsequences of this policy on output, the price level, the interest rate and theunemployment rate.

Step 1: To examine the relationship between overall price levels and the total output of an economy,…

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question 18 Use the following table for the question below. Dynaco Decision Synergy Decision Large Budget Small Budget Large Synergy.gains.20.million Synergy gains zero Budget Dynaco gains 30 million Dynaco gains 70 million Small Synergy.gains.30.million Budget Dynaco gains zero Synergy.gains.40.million Dynaco gains 50 million If the two firms were allowed to work together (collude) and create a binding agreement, what is the optimal (best) outcome for both of them? O Synergy gains $40 million and Dynaco gains $50 million O Synergy gains zero and Dynaco gains $70 million O Synergy gains $20 million and Dynaco gains $30 million O Synergy gains $30 million and Dynaco gains zero
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Consider the short-term model characterized by the following AS and AD curves: Ý, = à – bm(x, – ñ) (AD] and A; = x; + vỶ, + õ, (AS). The economy is in steady state at time t = -1 (that is, a-1 = ñ, ō-1 = 0, and ā = 0). It is hit by a one-time inflation shock öy = .025 at time i = 0. For now, expectations are adaptive: 7 = ,-1. You'll use the answer to this question in several follow-up questions. To keep track of your results, you should use a spreadsheet application. If you don't already have one, you can use this hyperlinked template e (it's a Google Sheet). Calculate zo assuming b = 0.5, m = 2, ñ = 0.03, and ū = 1. Enter your answer as a percentage and round to the nearest hundredth.
Complete the following table to compare the results of an unanticipated expansionary policy to those of an anticipated expansionary policy in the short run and long run. Determine whether, in the short run, the level of output increases, decreases, or remains unchanged relative to the potential output level when the expansionary policy is anticipated versus unanticipated. Additionally, determine whether, in the long run, the actual price level is above, below, or the same as initial expectations under both scenarios, and, again, determine whether the level of output increases, decreases, or remains unchanged. Anticipated Expansionary Policy Unanticipated Expansionary Policy Short-Run Change in Output Decrease/Increase* Decrease/Increase/No Change* Long-Run Change in Price Level Same as Initial expectation/Higher then initial expectations/ lower then initial expectations* (same options as box on the left) ** Long-Run Change in Output Decrease/Increase/No change*…
Suppose that a given economy, in which the level of production (Y) is not at the natural level (Yn), an economy in which Y#Yn. 1) Using the AS/AD model, give an explanation of what will happen in the future and suggest a fiscal and/or a monetary policy to adjust the output and further analyse the effect of the suggested policy on employment and price level. 2) Illustrate your answer in part 1) by presenting and analysing data from the UK by identifying two occasions since 1950 (each covering a span of 2-5 years), where such an adjustment process occurred.
What kind of problem is the U.S. economy facing? Give one possible reason why this problem may exist. State whether the Fed should use fiscal policy or monetary policy to address the situation. Given the stated policy in your answer to question #2, indicate what specific policy tool you would recommend as the appropriate course of action and why you are recommending this tool. Policy Implementation: Utilizing the figure above as your starting point, illustrate (graph) the macroeconomic situation of the United States after a successful implementation of the policy tool you’ve recommended. What are the effects on the macroeconomy on GDP and the aggregate price level?
Suppose that the following equations represent an entire economy. What size output shock will send the economy into a liquidity trap? t = y0.5 (r - 3%) r = 2% + (πt - 2%) + 2.9t πt = 2% + t
Dual Mandate: Suppose the central bank has a dual mandate. This implies the following IS-MP-AS model: IS: Y a-b(Re-F) MP: Re-F= m(₁ - 7) + dŸ₁ tt-1+0+0 AS (a) Why does the above model represent a dual mandate? (b) Solve for the AD curve of this economy. (c) Compare the slope of the AD curve in this economy to the slope of an AD curve in an economy with a single mandate (i.e. set d= 0.). Does the slope make sense given the central bank's objectives? Explain using a graph.
B. Consider the following model where the monetary policy will be the only policy variable affecting demand for output. For expositional purposes the income velocity of money is held constant. With these assumptions the aggregate demand for output can be written in logs as: mt + v = Pt+ Yt The above equation is the equation of exchange in logs (equation that addresses the relationship between money and price level, and between money and nominal GDP. The equation tells us that total spending (M x V) is equal to total sales revenue (P x Y)). To complete the model we need to add the aggregate supply equation and a money supply rule. yt = y'+ a(pt - Et-1pt1) (2) mt = Byt-1+Et (3) Given that agents form expectations rationally, find a solution for (i) yt and (ii) pt. Is there any scope in this model for the policy authorities to influence the output through systematic stabilisation policy? Explain your answer.
a and b please
Question 4: Stability of the IS-LM model Consider the following short-run dynamics in the closed-economy IS-LM model. It is assumed that the price level is fixed and (for convenience) has been normalized to unity (P = 1): Ř = ¢r [(Y, R) – M], Ý = 2 C(Y – T) + I(R) + G – Y, 2 >0, P1 > 0, where Y is output, R is the interest rate, M is the money stock, C is consumption, T is taxes, I is investment, and G is government consumption. As usual, a dot above a variables denotes that variable's time rate of change, i.e. Ř = dR/dt and Ý = dY/dt. (a) Interpret these equations. (b) Can you say something about the relative speeds of adjustment in the goods and financial markets?
For the next four questions, assume the economy can be described by the following set of equations: C/Ỹ = 0.7 1/Ỹ = 0.1 – 4(R – F) G/Ỹ = 0.2 C+I+G =Y Also assume that i = 0.02 and Y = 10. This is a complete IS model. You will be given the value of R set by monetary policy in each question. For all questions, enter the answer rounded to 1 decimal place. Suppose a demand shock (which may be positive or negative) results in a new consumption function such that C/Y =0.9. Assume the other demand functions for investment and government spending are unaltered, and that monetary policy is neutral so that R=0.02. What is the value of short-run output ÿ in percent? Answer:

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