Suppose that the Canadian economy is governed by the following equations Y = Y, - a(r -p)+e; T: = i- E17+1 T = E-1T +(Y - Y1) + vt E1T+1 = T i = T +p+0(7 – n)+by (Yt - Y;) (1) (2) (4) (5) Since the coefficient is negative, more sensitive implies a coefficient less than-80 (e.g.,-90,-100, etc). Recall that the sacrifice ratio is computed by dividing the output lost by the amount of disinflation. (a) Derive the long-run equilibrium for the dynamic AD-AS model. Assume there are no shocks to demand or supply and that inflation has stabilized.
Suppose that the Canadian economy is governed by the following equations Y = Y, - a(r -p)+e; T: = i- E17+1 T = E-1T +(Y - Y1) + vt E1T+1 = T i = T +p+0(7 – n)+by (Yt - Y;) (1) (2) (4) (5) Since the coefficient is negative, more sensitive implies a coefficient less than-80 (e.g.,-90,-100, etc). Recall that the sacrifice ratio is computed by dividing the output lost by the amount of disinflation. (a) Derive the long-run equilibrium for the dynamic AD-AS model. Assume there are no shocks to demand or supply and that inflation has stabilized.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
- Please help me out with solving for the long run equilibrium for the dynamic Ad-As model. Graph the impact of the demand shock and explain. Thanks!
Transcribed Image Text:3. A Dynamic AD-AS Model of the Canadian Economy
Suppose that the Canadian economy is governed by the following equations
Y = Y - a(r -p) + €;
YI = i-E+1
T = E1-17 +(Y- Yt)+v
E1T+1 = T
i = 7 +p+0(7 - n)+Oy(Y- Ý;)
(1)
(2)
(3)
(4)
(5)
Since the coefficient is negative, more sensitive implies a coefficient less than -80 (e.g.,-90, -100, etc).
2Recall that the sacrifice ratio is computed by dividing the output lost by the amount of disinflation.
(a) Derive the long-run equilibrium for the dynamic AD-AS model. Assume there are
no shocks to demand or supply and that inflation has stabilized.
(b) Now suppose that monetary-policy has the following rule
iį = T; +p +0r(7: – 7)+ Oy(Y; – Ýt)
where p is greater than p, implying monetary policymakers overestimate the natu-
ral rate of interest. The rest of the model is the same. Solve for the long-run equi-
librium under this case. Compare your long-run equilibrium to the one obtained in
(a)
(c) Suppose that the central bank follows the rule used in (a), but does not satisfy the
Taylor Principle so that 07 < 0. Use a graph to analyze the impact of a demand
shock. Does this analysis contradict the Taylor Principle as a guideline for monetary
policy?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education