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Consider the standard AD/AS again. AD: Y =ā - bm (πt - π) AS: πt = π£ + vỸt + ō Now, let's assume that |π = π₁-1 + h, if πt-1 > |π = π, if πt-1 ≤ T The interpretation of the above inflation expectation is that whenever the inflation rate in the previous period exceeds the target inflation rate, firms expect that the inflation rate will exceed the previous period's one by some constant h percent. To give an example, let's say that h = 1%, Tt-1 = 3% and 72%, then the expected inflation, π is 4%. However, if the inflation rate in the previous period is less than or equal to the target inflation rate, firms expects that the inflation will be at the target level. Question 3 Part al Let's assume that the economy receives a temporary positive inflation shock, i.e., one period increase in ō. Assuming h is greater that the value of that shock, hō, show the effect of one period increase in ō. Demonstrate your answer both analytically as well as graphically. Interpret your results. Question 3 Part a2 Let's assume that the economy receives a temporary negative inflation shock, i.e., one period decrease in ō. Show the effect of one period decrease in ō. Demonstrate your answer both analytically as well as graphically. Interpret your results. Question 3 Part bl Using the new AS/AD framework demonstrate the effect of a temporary negative AD shock, one period increase in ā, both analytically as well as graphically. Interpret your results.

Consider the standard AD/AS again. AD: Y =ā - bm (πt - π) AS: πt = π£ + vỸt + ō Now, let's assume that |π = π₁-1 + h, if πt-1 > |π = π, if πt-1 ≤ T The interpretation of the above inflation expectation is that whenever the inflation rate in the previous period exceeds the target inflation rate, firms expect that the inflation rate will exceed the previous period's one by some constant h percent. To give an example, let's say that h = 1%, Tt-1 = 3% and 72%, then the expected inflation, π is 4%. However, if the inflation rate in the previous period is less than or equal to the target inflation rate, firms expects that the inflation will be at the target level. Question 3 Part al Let's assume that the economy receives a temporary positive inflation shock, i.e., one period increase in ō. Assuming h is greater that the value of that shock, hō, show the effect of one period increase in ō. Demonstrate your answer both analytically as well as graphically. Interpret your results. Question 3 Part a2 Let's assume that the economy receives a temporary negative inflation shock, i.e., one period decrease in ō. Show the effect of one period decrease in ō. Demonstrate your answer both analytically as well as graphically. Interpret your results. Question 3 Part bl Using the new AS/AD framework demonstrate the effect of a temporary negative AD shock, one period increase in ā, both analytically as well as graphically. Interpret your results.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Consider the standard AD/AS again. AD: Y = a - bm (πt - π) AS: πt = π + VỸt + ō Now, let's assume that π = πt-1+h, if πt-1 > T π = π, if πt-1 T The interpretation of the above inflation expectation is that whenever the inflation rate in the previous period exceeds the target inflation rate, firms expect that the inflation rate will exceed the previous period's one by some constant h percent. To give an example, let's say that h = 1%, Tt-1 = 3% and = 2%, then the expected inflation, is 4%. However, if the inflation rate in the previous period is less than or equal to the target inflation rate, firms expects that the inflation will be at the target level. Question 3 Part al Let's assume that the economy receives a temporary positive inflation shock, i.e., one period increase in ō. Assuming h is greater that the value of that shock, h> ō, show the effect of one period increase in ō. Demonstrate your answer both analytically as well as graphically. Interpret your results. Question 3 Part a2 Let's assume that the economy receives a temporary negative inflation shock, i.e., one period decrease in ō. Show the effect of one period decrease in ō. Demonstrate your answer both analytically as well as graphically. Interpret your results. Question 3 Part b1 Using the new AS/AD framework demonstrate the effect of a temporary negative AD shock, one period increase in ā, both analytically as well as graphically. Interpret your results.
Transcribed Image Text:Consider the standard AD/AS again. AD: Y = a - bm (πt - π) AS: πt = π + VỸt + ō Now, let's assume that π = πt-1+h, if πt-1 > T π = π, if πt-1 T The interpretation of the above inflation expectation is that whenever the inflation rate in the previous period exceeds the target inflation rate, firms expect that the inflation rate will exceed the previous period's one by some constant h percent. To give an example, let's say that h = 1%, Tt-1 = 3% and = 2%, then the expected inflation, is 4%. However, if the inflation rate in the previous period is less than or equal to the target inflation rate, firms expects that the inflation will be at the target level. Question 3 Part al Let's assume that the economy receives a temporary positive inflation shock, i.e., one period increase in ō. Assuming h is greater that the value of that shock, h> ō, show the effect of one period increase in ō. Demonstrate your answer both analytically as well as graphically. Interpret your results. Question 3 Part a2 Let's assume that the economy receives a temporary negative inflation shock, i.e., one period decrease in ō. Show the effect of one period decrease in ō. Demonstrate your answer both analytically as well as graphically. Interpret your results. Question 3 Part b1 Using the new AS/AD framework demonstrate the effect of a temporary negative AD shock, one period increase in ā, both analytically as well as graphically. Interpret your results.
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