Suppose there is a decrease in ?t. a) Analyse the short-run effects (on prices, wage, employment, interest rate, and output gap) of this shock. Use diagram to support your answer. b) Propose an appropriate fiscal or monetary policy response to this shock and describe the effects of that policy response on output, prices, interest rate, employment and wage rate. c) Compare the short-run effects (on prices and output) of

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter16: Expectations Theory And The Economy

Section: Chapter Questions

Problem 1WNG

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Question

Suppose there is a decrease in ?t.
a) Analyse the short-run effects (on prices, wage, employment, interest rate, and output gap) of this shock. Use diagram to support your answer.
b) Propose an appropriate fiscal or monetary policy response to this shock and describe the effects of that policy response on output, prices, interest rate, employment and wage rate.
c) Compare the short-run effects (on prices and output) of the shock in two countries that only differ in their degree of price rigidity ? (? = ?̅ + ?(?? − ???)).
• In economy A, menu costs are negligible and ? = 100
• In economy B, menu costs are large and ? = 0.1

Definition Definition Policy implemented by the central bank of a country (such as the Federal Reserve in the United States) to achieve certain macroeconomic objectives. Monetary policy is a supply-side macroeconomic policy that supervises the growth rate and money supply in the economy.

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