Assuming the economy has a strong-form market and that the current economy has reached its long-term equilibrium with optimal inflation rate π = 3 (%) and the aggregate output y = 10 (£bil). The economy has the following AD-AS curves: I. AD Curve: π = 10-0.7y II. AS Curve: π = 1+0.2y III. LRAS Curve: y = 10 Now, the central bank intends to use monetary policy to boost economic growth and suggest the government to increase £1bil in government expense. You are a researcher and now reviewing effect increased expense. a. What is the short-term equilibrium of π and y? b. What is the long-term equilibrium of π and y? c. What is the new AS curve? Do you think central bank’s suggestion on monetary policy effective?
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Assuming the economy has a strong-form market and that the current economy has reached its long-term equilibrium with optimal inflation rate π = 3 (%) and the
I. AD Curve: π = 10-0.7y
II.
III. LRAS Curve: y = 10
Now, the central bank intends to use
a. What is the short-term equilibrium of π and y?
b. What is the long-term equilibrium of π and y?
c. What is the new AS curve? Do you think central bank’s suggestion on monetary policy effective?
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