question 3 Consider the AS-AD and three-equations models of a closed economy discussed in the course. (a). Write down the expressions for the AS and AD curves and interpret the expressions: what is the intuition behind the two curves? What must be true of the model parameters and variables in the long-run equilibrium, i.e. in the steady state? (b). Analyse the effects of an oil supply shock that causes a temporary increase in inflation, using the three-equation model. Assume that the shock lasts for one-period and then assumes the value 2%. Describe the mechanisms that bring the economy back to long-run equilibrium. What happens to aggregate demand? (c). Consider an economy that starts out in steady state when the central bank decides to make the inflation target more ambitious. Analyse the effects of a decrease in the inflation target from n to n". Explain the mechanisms behind the adjustment to the new steady state.
question 3 Consider the AS-AD and three-equations models of a closed economy discussed in the course. (a). Write down the expressions for the AS and AD curves and interpret the expressions: what is the intuition behind the two curves? What must be true of the model parameters and variables in the long-run equilibrium, i.e. in the steady state? (b). Analyse the effects of an oil supply shock that causes a temporary increase in inflation, using the three-equation model. Assume that the shock lasts for one-period and then assumes the value 2%. Describe the mechanisms that bring the economy back to long-run equilibrium. What happens to aggregate demand? (c). Consider an economy that starts out in steady state when the central bank decides to make the inflation target more ambitious. Analyse the effects of a decrease in the inflation target from n to n". Explain the mechanisms behind the adjustment to the new steady state.
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter1: Welcome To Economics!
Section: Chapter Questions
Problem 26CTQ: Suppose, as an economist, you are asked to analyze an issue unlike anything you have ever done...
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Transcribed Image Text:question 3
Consider the AS-AD and three-equations models of a closed economy discussed in the
course.
(a). Write down the expressions for the AS and AD curves and interpret the expressions: what
is the intuition behind the two curves? What must be true of the model parameters and
variables in the long-run equilibrium, i.e. in the steady state?
(b). Analyse the effects of an oil supply shock that causes a temporary increase in inflation,
using the three-equation model. Assume that the shock lasts for one-period and then assumes
the value 2%. Describe the mechanisms that bring the economy back to long-run equilibrium.
What happens to aggregate demand?
(c). Consider an economy that starts out in steady state when the central bank decides to
make the inflation target more ambitious. Analyse the effects of a decrease in the inflation
target from 7 to n". Explain the mechanisms behind the adjustment to the new steady state.
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