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- Answer full quation otherwise don't attempt this question (i) Using aggregate supply and demand curves illustrate the different effects on output of demand-pull and cost-push inflation. (ii) Show using an aggregate supply and demand curve diagram, how an initial increase in aggregate demand though monetary policy may have no effect on output if workers with “rational expectations” seek wage rises to compensate for the expected higher price level.The Russia-Ukraine war triggers a surging of crude oil price to a record high that leads to anegative supply shock of an economy. If the economy is currently at the full-employmentoutput, how does it affect the aggregate price and real output level in the short- and long-runif the central bank does not carry out any stabilization policies? Explain with the aid of anaggregate demand-aggregate supply diagram.3. a) Using AD-AS model, explain how a negative demand shock due to COVID 19 will affect the economy in the short run and long run (Show short run and long run adjustment in a single diagram). b) Derive the equation of Expectation Augmented Phillips curve using standard equation of Aggregate Supply (AS) and explain causes of inflation in terms of it. How does expectation augmented Phillips curve explain Stagflation?
- (a) Assume the economy starts at full employment. Illustrate the short-run and long-run impact of an unexpected monetary contraction using the IS-LM model, the AD-AS model, and the Phillips curve. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. Explain in words what your graphs illustrate. ) (b) Assume that people form expectations rationally and that the sticky-price model describes the aggregate supply curve in the economy. For each of the following scenarios explain whether or not monetary policy can have real effects on the economy. i. The central bank determines monetary policy at the same time that firms are setting prices, so that both firms and policymakers have all of the same information. ) ii. The central bank determines monetary policy after firms have set prices using information not available at the time prices were set. )…Using the Frieman-Phelps expectations-augmented Phillips curve, if actual and expected inflationare equal to each other, thenA)workers are correctly forecasting inflation and the economy is in long run equilibriumB)the policymaker needs to pursue expansionary policy to create more output.C)in the long run workers will adjust their expectations, resulting in a business cycle in the longrun.D)the economy is in an expansion above the natural rate of output.Assume that the price level in an economy is stable with expected inflation initially equal to 3% in period 0. Further assume the economy is then hit by an expansion at the beginning of period 1, and employment remains at a constant high level until the beginning of period 4. With ‘time period’ on the xaxis and ‘inflation rate’ on the y-axis: (i) Plot the path of the bargaining gap (assume it is equal to 1%), inflation and expected inflation from period 1 to the end of period 4. (ii) Provide some reasons for why the bargaining gap might disappear after period 4, and state any other assumptions you are making. (iii) Explain how an increase in the central bank’s policy interest rate would affect the exchange rate through the market for financial assets (such as government bonds). What impact would this have on aggregate demand?
- Case : Dealing with Asymmetric Shocks in the EurozoneMember countries of the Eurozone are currently hit by the Covid-19 pandemic, though somecountries are hit harder than others as can be seen from the recent projections of the IMF,here shown for Germany and Italy as an example, in the figure below. Question 1 Explain what is meant by an asymmetric shock and discuss the role of monetary, fiscal andincome policies could play to deal with such a shock for a Eurozone member country.Question 2:a. Give one example of a demand shock (a change that shifts demand curve) and oneexample of supply shock (a change that shifts supply curve) that may lead to an inflationarygap (positive output gap).b. How would the economy eliminate the inflationary gap and return to its long runequilibrium without any interventions from the policymakers (self-correcting mechanism)?How does high inflation lead to a recession in the country? Explain the role ofthe Government and the Central Bank to address the economic recessionproblem by using appropriate fiscal and monetary policies. Are there anypotential problems with such policies? Please answer in detail
- The importance of using rather than saving your ammunition in the presence of the zero lower bound. Suppose inflation is described by the accelerations Phillips curve, and that output is determined by a simple IS curveInitially, the central bank is setting the nominal interest rate at a strictly positive level: i(0) > 0. Assume(a) Suppose the central bank keeps i constant at i (0). Sketch the behavior of inflation and output over time.(b) Suppose the central bank keeps i constant at i (0) until some time when bπ(t) < 0, and then permanently reduces i to zero. Sketch the behavior of inflation and output over time.(c) Suppose the central bank permanently reduces i to zero at t = 0. Sketch the behavior of inflation and output over time.(d) Explain your results intuitively.How does high inflation lead to a recession in the country? Explain the role ofthe Government and the Central Bank to address the economic recessionproblem by using appropriate fiscal and monetary policies. Are there anypotential problems with such policies?( Answer in 1000 words)1.True or False: Businesses and government care only about long-run economic forecasts, because they cannot adapt policy or output to accommodate short-run fluctuations. 2.Suppose the most recent data show that the average initial weekly claims for unemployment insurance have recently increased. This change suggests a )RECCESSIONARY or EXPANSIONARY) period in the coming months? 3.Economists disagree about how quickly the economy adjusts to an aggregate demand shock. In the view of some economists, people form expectations based on present realities and change expectations gradually as their experience unfolds. Such expectations are said to be rational, unexpected, adaptive, reasonable, or great ? 4. Suppose an unanticipated increase in investment spending causes the aggregate demand curve to shift to the right (from AD1AD1 to AD2AD2). According to adherents of the adaptive-expectations theory, the unanticipated change in aggregate demand will cause the economy to move in which…