Observe the classical version of the IS-LM model with all misperceptions. What is the main assumption and the main implication? How does the misperception theory work?
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Observe the classical version of the IS-LM model with all misperceptions. What is the main assumption and the main implication? How does the misperception theory work?
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- 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.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.Precautionary saving and prudence The Query to Example 17.2 asks how uncertainty about the future might affect a person's savings decisions. In this problem we explore this question more fully. All of our analysis is based on the simple two-period model in Example 17.1. a. To simplify matters, assume that r= in Equation 17.15. If consumption is certain, this implies that u(c0)=u(c1) or c0=c1. But suppose that consumption in period 1 will be subject to a zero-mean random shock, so that c1=c1p+x, where c1p is planned period- 1 consumption and x is a random variable with an expected value of 0. Describe why, in this context, utility maximization requires u(c0)=E[u(c1)] . b. Use Jensen's inequality (see Chapters 2 and 7 ) to show that this person will opt for c1pc0 , if and only if u is convex-that is, if and only if u0 . c. Kimball" suggests using the term "prudence" to describe a person whose utility function is characterized by u0 . Describe why the results from part (b) show that such a definition is consistent with everyday usage. d. In Example 17.2 we showed that real interest rates in the U.S. economy seem too low to reconcile actual consumption growth rates with evidence on individuals willingness to experience consumption fluctuations. If consumption growth rates were uncertain, would this explain or exacerbate the paradox?
- Do you remember the Harrod-Domar model? Derive it and apply it to a numerical case where d=4%, s=35%, and gY=8% last year. If s is expected to rise to 45% next year, what will happen to gY?In the classical model, a decline in output in a recession: a) is temporary and will be quickly corrected. b) is usually the result of Say’s Law. c) is permanent and calls for active correction by government. d) is the result of the instability of investment.Compare the effects of a negative demand shock, for example, a decline in autonomous investment, in the Kesnesian and Classical models show the effects of this shock on the level of real income, employment, the price level and the rate of interest in both models Answer this question only by using diagrams.
- Based on the extended Mundell-Fleming model, show your understanding of how the PB curve is formed. What is the meaning of equilibrium of the model (IS, LM and PB intersect at one point)?(A Two-Period Sticky-Price Model). Consider a two-period, sticky-price economy like the one studied in lectures 11-13. Suppose that the household’s intertemporal optimality condition is of the form C2 C1 = β P1 P2 (1 + i), where C1 and C2 denote consumption in periods 1 and 2, P1 = P2 = 1 denote the price levels in periods 1 and 2, β = 0.9 denotes the subjective discount factor, and i denotes the nominal interest rate, which must satisfy the zero lower bound (ZLB). Suppose further that the full employment levels of output in periods 1 and 2 are given by Y¯ 1 = Y¯ 2 = 1, and that the economy is always at full employment in period 2 (the long run). Part 1: Suppose the central bank sets the nominal interest rate at the level i ∗ that minimizes unemployment without overheating. Calculate i ∗ . Part 2: Suppose that due to bad expected meteorological conditions, the full-employment level of output in period 2 is revised down to 0.8. Suppose that in response to this news, in period 1 the…With the theoritical of Permanent-Income Hypothesis in mind, explain how Friedman sought to reconcile the evidence about consumption from cross-sectional data with that from time series macroeconomic data?.
- In the extended version of the classical model, based on the misperceptions theory. a. Graphically show the effect of an unanticipated increase in money supply using the AS-AD model. Make sure to label the short-run equilibrium point. b. Repeat part (a). This time, assume that the public was anticipating this increase in money supply. c. Is the short-run equilibrium in part (b) point the same as in part (a). Why or why not?Which one of the following statements is true? In the pre-Keynesian era, prices were assumed not to fully adjust. In the Keynesian model diagram, prices are fixed. GDP is a value of goods and services domestically produced in a country at a given point in time. Say's Law says that demand creates its own production. In the IS/LM model, the interest rate is a function of investment.Undertake a model analysis using the IS-LM model. Using the IS-LM model, illustrate and discuss the impact of the Asian Financial Crisis on interest rates and economic activity (and thus the unemployment rate). Remember to explain any changes you have made to the curves and/or any shift