The economy is characterized by the following equations: An IS Curve Y₁ = ā- b(Rt - T) A Fisher equation: R₁ = it - Ett+1 A monetary policy rule: it = +xt +m(πt - π) + E₁ πt+1 A Phillips curve: π+ = Et−1πt + vỸt + §t· Where Xt is a monetary policy shock, which means a change in interest rates by the Fed that is exogenous. The rest of the notation is the same as in class. The economy has been in the long-run equilibrium. Xt is zero in the long-run. You will need the following values for some parameters: 1, m = 3, b = 1, π = 2% Suddenly, in a year we will call 2025, the Federal Reserve decides out of the blue to lower interest rates by 1 percentage point. That is X2025 = -1%. What is the value of short-run output in percentage points in the year 2025?
The economy is characterized by the following equations: An IS Curve Y₁ = ā- b(Rt - T) A Fisher equation: R₁ = it - Ett+1 A monetary policy rule: it = +xt +m(πt - π) + E₁ πt+1 A Phillips curve: π+ = Et−1πt + vỸt + §t· Where Xt is a monetary policy shock, which means a change in interest rates by the Fed that is exogenous. The rest of the notation is the same as in class. The economy has been in the long-run equilibrium. Xt is zero in the long-run. You will need the following values for some parameters: 1, m = 3, b = 1, π = 2% Suddenly, in a year we will call 2025, the Federal Reserve decides out of the blue to lower interest rates by 1 percentage point. That is X2025 = -1%. What is the value of short-run output in percentage points in the year 2025?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The economy is characterized by the following
equations:
An IS Curve Y₁ = ā- b(Rt - T)
A Fisher equation: R₁ = it - Ett+1
A monetary policy rule:
it = +xt +m(πt - π) + E₁ πt+1
A Phillips curve: π+ = Et−1πt + vỸt + §t·
Where Xt is a monetary policy shock, which
means a change in interest rates by the Fed that
is exogenous. The rest of the notation is the same
as in class. The economy has been in the long-run
equilibrium. Xt is zero in the long-run.
You will need the following values for some
parameters: 1, m = 3, b = 1, π = 2%
Suddenly, in a year we will call 2025, the Federal
Reserve decides out of the blue to lower interest
rates by 1 percentage point. That is
X2025 = -1%.
What is the value of short-run output in
percentage points in the year 2025?
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