Consider a standard AD-AS model. If the central bank responds relatively aggressively to inflation being below target, temporary supply shocks have relatively little effect on output. True/False. Remember to include your explanation.
Q: Why do temporary negative supply shocks pose adilemma for policymakers?
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- true/false, explain In the dynamic AS-AD model, a perfectly inelastic aggregate supply curve means the central bank cannot control the rate of output growth or the inflation rate.in the Lucas Imperfect Information model, do aggregate demand shocks have real affects? Explain. What is the implication of this result for stabilisation policy?Why do temporary negative supply shocks pose adilemma for policymakers?
- Consider a standard AD-AS model. The economy is affected by the following sequence of events. In period 1 there is a shock to the economy that is temporary. In period 2, the shock ends. But having observed an inflation outcome different to the inflation target, inflation expectations change from the inflation target to a value exactly equal to the observed inflation in period 1 (that is, expectations are not `anchored’). A temporary Negative demand shock would lead to output below potential in period 1, but above potential in period 2. Answer true or false. Please briefly explain your answer.When aggregate output is below the natural rate of output, what happens to the inflation rate over time if theaggregate demand curve remains unchanged? Why?“Policymakers would never respond by stabilizing output in response to a temporary positive supply shock.”Is this statement true, false, or uncertain? Explain youranswer
- 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)If the AS curve were more steeply sloped, how would the economy responddiferently to aggregate demand shocks (shocks to a )?In the monetarist version of the AD-AS framework, a decrease in velocity of money produces a ________________ shift of the _________ curve. Group of answer choices rightward; Ms (Money Supply) leftward; AD (Aggregate Demand) rightward; AS (Aggregate Supply) rightward; AD (Aggregate Demand)
- Apply the simple Keynesian model to discuss how feedback loops may affect the response of national output to aggregate demand shocks.The mainstream view of macroeconomic instability emphasizes sticky prices. To answer the following questions, modify the aggregate supply curve in the extended AD-AS model introduced in Chapter 35. First, imagine that both input and output prices are fifixed. What does the aggregate supply curve look like? If AD decreases in this situation, what will happen to equilibrium output and the price level? Next, imagine that input prices are fifixed, but output prices are flexible. What does the aggregate supply curve look like? In this case, if AD decreases, what will happen to equilibrium output and the price level? Finally, if both input and output prices are fully flflexible, what does the aggregate supply curve look like? In this case, if AD decreases, what will happen to equilibrium output and the price level? (Hint: If you are having trouble drawing these three aggregate supply curves, review the immediate-short-run aggregate supply curve and the short-run aggregate supply curve…Consider an AD-AS model with AD curve Y – Y* = - αγ (π - π*) + εand AS curve π = π + φβ(Y – Y*) + εwith parameter values α = 0.5, γ = 1, φ = 1, β = 0.5,and with inflation target π* = 0.02 and potential output normalised to Y* = 1.Starting from a long-run equilibrium with π = π* suppose there is a temporary demand shock ε = -0.05. Which of the following is TRUE? 1.In the short run, output is 5% below trend 2.In the short run, output is 4% below trend 3.In the short run, inflation is 1% 4.In the long run, output is 5% below trend