Find a solution for πt, yt and r₺ as function of the disturbances and the pa- rameters of the model. What are the effects of an unfavorable inflation shock (i.e. u increases) on output, interest rate and inflation in this case? Interpret your answer.
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- Please only answer part D (I already have part a, b, and c) In the New Keynesian model, suppose that in the short run the central bank cannot observe aggregate output or the shocks that hit the economy. However, the central bank would like to come as close as possible to economic efficiency. That is, ideally the central bank would like the output gap to be zero. Suppose initially that the economy is in equilibrium with a zero-output gap. (a) Suppose that there is a shift in money demand. That is, the quantity of money demanded increases for each interest rate and level of real income. How well does the central bank perform in relative to its goal? Explain using diagrams. (b) Suppose that firms expect total factor productivity to increase in the future. Repeat part (a). (c) Suppose that total factor productivity increases in the current period. Repeat part (a). (d) Explain any differences in your results in parts (a)–(c) and explain what this implies about the wisdom of following an…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 –In the New Keynesian model, suppose that in the short run the central bank cannot observe aggregate output or the shocks that hit the economy. However, the central bank would like to come as close as possible to economic efficiency. That is, ideally the central bank would like the output gap to be zero. Suppose initially that the economy is in equilibrium with a zero-output gap. (a) Suppose that there is a shift in money demand. That is, the quantity of money demanded increases for each interest rate and level of real income. How well does the central bank perform in relative to its goal? Explain using diagrams. (b) Suppose that firms expect total factor productivity to increase in the future. Repeat part (a). (c) Suppose that total factor productivity increases in the current period. Repeat part (a). (d) Explain any differences in your results in parts (a)–(c) and explain what this implies about the wisdom of following an interest rate rule for the central bank. Problem 6 assumes that…
- Using IS/MP and AS/AD analysis, show the impact of a cost push shock on a New Keynesian economy in which the central bank has a policy rule in which the real interest rate responds to deviations of the inflation rate from target, and in which expected future inflation is equal to current inflation.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?Analyze the implications of the New Keynesian Approach for rational Expectations. State your assumptions very well.
- 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.Explain the concept of “Divine Coincidence” and clearly state the cases where it holds and where it does not hold in the New-Keynesian model. In detail.In the basic New Keynesian Model, in a liquidity trap where initially there is a positive output gap and inflation is lower than the inflation target, forward guidance is a promise by the central bank of A. lower future output than would otherwise be optimal for the central bank. B. lower current output. C. higher future inflation than would otherwise be optimal for the central bank. D. lower future inflation than would otherwise be optimal for the central bank. E. lower current inflation.
- 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.If most business cycles are due to inflation shocks, then why is this an argument for passive policy set by rules and not active policy set by discretion?Question 2Explain fully how the AS/AD model is an update of the Keynesian model. Provide a graph of the equilibrium income in the Keynesian model, and compare it with a graph of the equilibrium income in the AS/AD model. Why are negative supply shocks much more harmful to an economy compared with negative demand shocks? Compare the policies which can be used to address negative demand shocks with policies to address negative supply shocks.