Suppose the Phillips curve is and the Aggregate Demand curve is πt = πt-1+Yt + Ot 3t = at — 5(Tt – 0.02) - where at = Ot = 0 in the steady state. (a) Calculate the steady state values of output and inflation in this economy. (b) Calculate the short- and long-run responses of the economy to the following shocks (use a table to report your answers, as well as show them graphically on the AD-AS graph, as well
Suppose the Phillips curve is and the Aggregate Demand curve is πt = πt-1+Yt + Ot 3t = at — 5(Tt – 0.02) - where at = Ot = 0 in the steady state. (a) Calculate the steady state values of output and inflation in this economy. (b) Calculate the short- and long-run responses of the economy to the following shocks (use a table to report your answers, as well as show them graphically on the AD-AS graph, as well
Chapter14: Macroeconomic Policy: Tradeoffs, Expectations, Credibility, And Sources Of Business Cycles
Section: Chapter Questions
Problem 4E
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![Suppose the Phillips curve is
and the Aggregate Demand curve is
Tt = Tt1+3ytot
Yt = at 5(πt - 0.02)
where at = Ot = 0 in the steady state.
(a) Calculate the steady state values of output and inflation in this economy.
(b) Calculate the short- and long-run responses of the economy to the following shocks (use a
table to report your answers, as well as show them graphically on the AD-AS graph, as well
as plot inflation and output against time):
(1) A one-time decrease in ot to -0.05.
(2) A one-time increase in at to 0.05 (at returns to 0 thereafter).
(3) A permanent decrease in the Fed's inflation target from 0.02 to 0.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F861993bc-74de-4324-a85e-ae6a13e77124%2F6944df78-a026-4dd5-8f25-e550f7cfeaeb%2F25qb5rb_processed.png&w=3840&q=75)
Transcribed Image Text:Suppose the Phillips curve is
and the Aggregate Demand curve is
Tt = Tt1+3ytot
Yt = at 5(πt - 0.02)
where at = Ot = 0 in the steady state.
(a) Calculate the steady state values of output and inflation in this economy.
(b) Calculate the short- and long-run responses of the economy to the following shocks (use a
table to report your answers, as well as show them graphically on the AD-AS graph, as well
as plot inflation and output against time):
(1) A one-time decrease in ot to -0.05.
(2) A one-time increase in at to 0.05 (at returns to 0 thereafter).
(3) A permanent decrease in the Fed's inflation target from 0.02 to 0.
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