(a) Derive the central banks’ best response for both economies.(b) Represent these economies in a graph and explain how the central banks would respondto a positive temporary aggregate demand shock, emphasising the key difffferencesbetween the two economies. (250 words max ) Consider two economies (A and B) both characterised by the following equations:Yt = At art-1πt = [Xπ² + (1 − x)πt−1] + 0.5(Yt — Ye)L = (Yt − Ye)² + ß(πt − π¹)²in which equation (1) represents the equilibrium in the goods market, equation (2) the supplyside of the economy, and equation (3) is the Central Bank's loss function. y is output; r ispolicy rate; and π are actual and target inflation, respectively; x and ß are parameters forcentral bank's credibility and inflation aversion respectively.=The values for and for Economy A are xX0.8 and 3 = 1.The values for x and 3 for Economy B are x = 0.5 and 31.5.

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ation (1) represents the equilibrium in the goods market, equation conomy, and equation (3) is the Central Bank's loss function. Y is and are actual and target inflation, respectively; x and 3 are 's credibility and inflation aversion respectively. X Yt = At-art-1 πt = [xπ² + (1 − x)πt−1] + 0.5(Yt — Ye) L = (yt − Ye)² + ß(πt − π¹)² 2 T T For X For X and 3 for Economy A are x = 0.8 and 3 = 1. and 3 for Economy B are x = 0.5 and 3 = 1.5.

ation (1) represents the equilibrium in the goods market, equation conomy, and equation (3) is the Central Bank's loss function. Y is and are actual and target inflation, respectively; x and 3 are 's credibility and inflation aversion respectively. X Yt = At-art-1 πt = [xπ² + (1 − x)πt−1] + 0.5(Yt — Ye) L = (yt − Ye)² + ß(πt − π¹)² 2 T T For X For X and 3 for Economy A are x = 0.8 and 3 = 1. and 3 for Economy B are x = 0.5 and 3 = 1.5.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter12: The Partial Equilibrium Competitive Model

Section: Chapter Questions

Problem 12.3P

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