(a) Assume a temporary negative aggregate supply shock strikes an economy. Please explain how a central bank with a strict inflation target will respond to this event?
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- Assume that as a consequence of an IS shock the economy is initially at a point with output above equilibrium (y > ye), and inflation of 4% above a 2% target. By means of a diagram, explain how the central bank will respond to this new information about economic conditions and discuss the effects on the economy.Consider the original AD/AS model in steady state. If the central bank fights against inflation more aggressively, explain how would inflation and short-run output respond differently to aggregate demand shock? (Hint: m-bar)Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility.Using a graph of aggregate demand and supply EXPLAIN how the credibility of each country’s central bank affect economic outcomes, if both countries are hit with the samea)negative temporary aggregate supply shock?
- The Russia-Ukraine war triggers a surging of crude oil price to a record high that leads to anegative supply shock of an economy. If the economy is currently at the full-employmentoutput, how does it affect the aggregate price and real output level in the short- and long-runif the central bank does not carry out any stabilization policies? Explain with the aid of anaggregate demand-aggregate supply diagram.Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility. Assume that in 2020, both countries are hit with the same COVID-19 shock. If the both central banks announce an autonomous easing policy to reduce the unemployment rate, a) How does the credibility of each country’s central bank affect the speed of adjustment of the aggregate supply curve to policy announcements?Suppose that survey measures of consumer confidence indicate a wave of pessimism is sweepingthe Pakistan economy. If policymakers do nothing, what will happen to aggregate demand? Whatshould the State Bank do if it wants to stabilize aggregate demand?
- As monetary policymakers become more concernedwith inflation stabilization, the slope of the aggregatedemand curve becomes flatter. How does the resulting change in the slope of the aggregate demand curvehelp stabilize inflation when the economy is hit with atemporary negative supply shock? How does this affectoutput? Use a graph of aggregate demand and supply todemonstrate.What would happen when there are money demand shock and money supply shock? Explain it by using IS-LM and AD-AS framework.If the economy begins at an equilibrium at potential output, a negative aggregate demand shock has which of the following effects in the short-ru? a. output and prices increase and unemployment falls below the natural rate b. output and prices increase and unemployment rises above the natural rate c. output and prices decrease and unemployment rises above the natural rate d. output and prices decrease and unemployment falls below the natural rate
