Consider the following extended classical economy (in which the misperceptions theory holds): AD Y= 300 + 10 SRAS Y=Y +P-p° Full-employment output Y = 800 Natural unemployment rate u=0.04 a. Suppose that the money supply M = 1000 and the expected price level p° = 20. %3! %3D The short-run equilibrium value of output Y is 800 , and the short-run equilibrium value of the price level P is 20 (Type integers or decimals rounded to two decimal places as needed.) The long-run equilibrium value of output Y is, and the long-run equilibrium value of the price level P is (Type integers or decimals rounded to two decimal places as needed.)
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- Assume that a country’s economy is in a short-run equilibrium and the actual unemployment rate is lower than the natural rate of unemployment. Using a correctly labeled graph of the long-run aggregate supply curve, short-run aggregate supply curve, and aggregate demand curve, show each of the following. Current price level, labeled PL1, and current output level, labeled Y1 The full-employment output level, labeled YF. What open-market operation can the country’s central bank use to move the economy toward its long-run equilibrium? Use a correctly labeled money-market graph to show how the country’s central bank action to move the economy toward its long-run equilibrium affects the equilibrium nominal interest rate in the short run. Based on the interest rate change from part (c), will each of the following increase, decrease, or remain the same in the short run? Real output. Explain. Natural rate of unemployment Assume instead that the central bank does not pursue…Consider the classical AS-AD model with misperceptions. Assume that the economy is initially at its general equilibrium. Now, suppose the central bank considers an increase in the nominal money supply that is not anticipated by households or firms. a. How does the misperception theory work? b. Which of the three markets is first affected (labor, goods, or asset market)? Explain and show graphically how this market is affected by an unanticipated increase in the nominal money supply. c. Use the classical version of the AS-AD model with misperceptions to explain and to show graphically how an unanticipated increase in the nominal money supply affects the short-run equilibrium. d. Use the classical version of the AS-AD model with misperceptions to explain and to show graphically how an unanticipated increase in the nominal money supply affects the long-run (general) equilibrium.Suppose that County A has a money demand function given by Md= 50+ 2Y- 5r, while Country Bhas a money demand function given by Md= 50+ 2Y-25r. From this, we can conclude thatA)the LM in A is steeper than in BB)the LM in B is steeper than in AC)the LM in A is vertical while the LM in B is horizontalD)Country A is more "Keynesian" whereas Country B is more "classical" in structure.
- Consider the ASAD model of a closed economy with zero ongoing inflation and workers misperceptions. Firms are perfectly competitive, produce output with diminishing marginal returns to labour and have perfect foresight over the price level. Workers, instead, expect zero inflation in each period. At time zero, the economy is in the potential equilibrium. There is a negative shock on aggregate demand – for example, a permanent fall in desired autonomous consumption at time t = 1. What are the effects of the shock on the equilibrium real wage in the short and in the medium run?Consider the AD-AS model discussed during the lectures. Assume that the aggregate demand curve is given by Y=8-0.5 π, that the long run aggregate supply curve is given by Yp=7, that the short run aggregate supply curve is given by π = π_expect + 0.3(Y-Yp), and that the monetary rule is given byr=1+0.3 π. Suppose the economy is suffering a decrease in the potential level of output, due to some ill-designed new regulation. According to the AD- AS model, what is more suitable to offset the subsequent decline in output, an expansionary monetary policy or an expansionary fiscal policy?A Keynesian economy is described by the following equations. Consumption Cd = 250 + 0.5(Y - T) - 250r Investment Id = 250 - 250r Government purchases G = 300 Government taxes T = 300 Real money demand L = 0.5Y - 500r + πe Money supply M = 3000 Full-employment output Y = 1250 Expected inflation πe = 0 (HINT a: The expected rate of inflation is assumed to equal zero so that money demand depends directly on the real interest rate, which equals the nominal interest rate. Domestic Savings, Sd =Y - C - G. In equilibrium set domestic savings equal to domestic investment, so Sd = Id) Calculate the values of the real interest rate (r), consumption (Cd), and investment (Id) for the economy in general equilibrium.
- a) Which of the following would a classical macroeconomist disagree with? The interest rate is the price of time or productivity of capital Nominals effect nominals Recessions are caused by an over production of all economic goods Prices should be as flexible as possible Effective demand comes from prior supply b) Which of the following is true? The expected costs and returns for holding money are important for estimating the demand of real cash balances The difference between nominal GNP and real GNP is that nominal GNP has been adjusted by a price deflator to account for changes in the value of money (inflation) People in Group 1 receive the inflation tax on their cash-balances Interest is the price of money The real money supply is equal to the nominal money supply divided by the real money supplyAssume an economy’s annual money velocity in circulation is 10. Please answer the following two question: In the view of monetarists (i.e. neoclassical view), if the annual economic growth rate is 6%, what should be the money supply increasing rate to maintain a low inflation rate as 3%? Please show equation.In the Neoclassical-Keynesian Synthesis ASAD model, let us suppose that the interest rate has no effect on real money demand. What does this imply for (1) the slope of the IS curve, for (2) the slope of LM curve, and for (3) the slope of the AD curve? (1) The slope of the IS curve – (2) The slope of the LM curve – (3) The slope of the AD curve –
- A Keynesian economy is described by the following equations. Desired consumption equation: Cd = 300 + 0.4(Y – T) – 300r Desired investment equation: I d = 300 – 300r Government purchases G = 317 Taxes T = 305 Money demand equation L = 0.4Y – 600(r + πe ) The nominal money supply M = 4428 The expected rate of inflation, πe = 0.03 Full-employment values of output Y = 1305 2 (a) Calculate the values of the real interest rate, the price level, consumption, and investment for the economy in general equilibrium. (b) Now suppose government purchases increase to 347 with no change in taxes. What will be the real interest rate, the price level, output, consumption, and investment in the short run? What will be the real interest rate, the price level, output, consumption, and investment in the long run?Suppose the economy is at its long- run equilibrium when there is a sudden increase in wealth. Using IS-MP, AD-IA answer compare the following variables to their initial long-run equilibrium. What happens to short-run real GDP? a) goes up b) goes down c) stays the same d) unknowable What happens to short-run real interest rates? a) goes up b) goes down c) stays the same d) unknowable What happens to short-run inflation? a) goes up b) goes down c) stays the same d) unknowable What happens to long-run real interest rates? a) goes up b) goes down c) stays the same d) unknowable What happens to long-run inflation? a) goes up b) goes down c) stays the same d) unknowableAssume 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.