Question 3: Suppose that we have the following equations for the output gap and inflation in a closed economy Ý -0.5-(i--0.02) n = +Y. Draw a graph and show an exogenous shock to money demand. Assume that the inflation target is 2 percent, n =0.02 and i= 0.04 so that the output gap is zero and inflation is on target. Suppose now that expected inflation increases to 3 percent: A) What happens to the output gap and inflation if the interest rate is kept unchanged? B) What happens to the output gap and inflation if the interest rate is raised to 5 percent? C) What happens to the output gap and inflation if the interest rate is raised to 6 percent?

Question 3: Suppose that we have the following equations for the output gap and inflation in a closed economy Ý -0.5-(i--0.02) n = +Y. Draw a graph and show an exogenous shock to money demand. Assume that the inflation target is 2 percent, n =0.02 and i= 0.04 so that the output gap is zero and inflation is on target. Suppose now that expected inflation increases to 3 percent: A) What happens to the output gap and inflation if the interest rate is kept unchanged? B) What happens to the output gap and inflation if the interest rate is raised to 5 percent? C) What happens to the output gap and inflation if the interest rate is raised to 6 percent?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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