5 The economy is characterized by the followingequations:An IS Curve Y₁ =ā — b(R₁ − r)--A Fisher equation: Rt== it — Etπt+1A monetary policy rule:it = F + Xt +m(πt − π) + Еtπt+1,-A Phillips curve: π₁ = Et−1πt +vỸt +§t.Where Xt is a monetary policy shock, whichmeans a change in interest rates by the Fed that isexogenous. The rest of the notation is the same asin class. The economy has been in the long-runequilibrium. Xt is zero in the long-run.You will need the following values for someparameters: 1, m = 3, b = 1, π = 2%Suddenly, in a year we will call 2025, the FederalReserve decides out of the blue to lower interestrates by 1 percentage point. That isX2025 = -1%.What is the value of the inflation rate inpercentage points in the year 2025?

Finding the long-run equilibrium interest rate (R) and inflation rate (πe)We are given the following…

Answered: The economy is characterized by the…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter14: Modern Macroeconomics And Monetary Policy

Section: Chapter Questions

Problem 10CQ

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If we use the simple monetary policy rule R: = F + m(Tt – ñ), and the IS curve equation Yt = ā – b(R¢ – F), and inflation evolving according to the Phillips T +vÝt,with inflation expectations formed using T Curve equation: Tt %3D Tt-1. We observe: D = 0.5 marginal product of capital is 5%, target rate of inflation is 3%, the current rate of inflation is 6%, m = 0.6, b = 0.7: Solve for the rate of inflation at time t+1. Enter you answer in percent rounded to one decimal place, but do not use any % symbol. This means something like 4.3% would just be entered "4.3". Type your answer.
Which of the following is a policy tool used to combat demand-pull inflation? a) Contractionary fiscal policy b) Expansionary monetary policy
Determine the impact of an increase in inflation expectations on output and inflation in the short-run and long-run. (Use AS-AD-LRAS curves to illustrate your reasoning).
The following graph plots a short-run Phillips curve for a hypothetical economy. Show the short-run effect of a contractionary monetary policy by dragging the point along the short-run Phillips curve (SRPC) or shifting the curve to the appropriate position. Now, show the long-run effect of a contractionary monetary policy by dragging either the short-run Phillips curve (SRPC), the long-run Phillips curve (LRPC), or both. As anticipated, inflation (rises/falls) and the short-run Phillips curve shifts (downward/upward) , highlighting the cost of fighting inflation, which is (higher unemployment in the long run/temporary unemployment/lower unemployment) . Which of the following examples represents a cost of inflation? Check all that apply. -An unintended redistribution of wealth from borrowers to lenders -A general decrease in purchasing power -Increased variability of relative prices -A coffee shop’s costs to reprint its menu to reflect fluctuating prices
Question 6 Below you find the supply determined model for the closed economy: Y = A - cri-1 (IS curve) II = II-1+a(Y -Y") (Phillips curve) re = r" + (IIt+1 – II") (Monetary policy rule) Solve the supply determined model and derive a definite solution for the inflation rate. calcula- tions, :
Suppose the economy is initially at full employment. Suppose further that in period 1 households experience an increase in their subjective discount factor from β to β′ > β. This type of shock is known as a natural rate shock. Characterize graphically the effect in period 1 on consumption of non-tradables, unemployment, the relative price of non-tradables, and the real wage measured in units of tradable goods under two alternative monetary policy regimes: A. A fixed exchange rate regime. B. A floating exchange rate regime in which the central bank pursues full employment and price stability.
Consider the AD-AS model Y = Y* — ay(π − π* ) + €D - π = π² + OB(Y−Y*) + €s Suppose the parameter values are a = 0.5, y = 2, p = 0.5, ß = 1 with inflation target * = 0.02 and natural output normalized to Y* = 1. = Suppose the economy begins in an initial long run equilibrium and there is then a temporary demand shock Ep = -0.05. In the short run, immediately following this shock, output and inflation are given by: Y = 1.025, π = -0.005 Y = 0.975, π = +0.005 Y = 1.025, π = +0.005 Y = 0.966, π = -0.003
Suppose Bangladesh Bank (BB) decided to follow the Taylor rule to conduct monetary policy. BB's target interest rate is the lending rate. The economists in BB understands that there will be some time lag for their policy to be effective and therefore they use a forecasted or expected inflation rate (instead of current inflation rate) in their policy rule. BB is equally concerned about output and inflation. According to BB's estimate the equilibrium real lending rate is 5 percent. BB's inflation target is 3 percent and the deviation of actual output from the potential output (as measured by the HP filter) is 1 percent.a. If the expected inflation rate is 6%, then at what target should the lending rate be set according to the Taylor rule?
Suppose the Federal Reserve sets the real interest rate to 1.5%. Moreover, assume that there are no demand shocks, that b = 2.5, and that F = 0.02. If the resulting change in the inflation rate is +0.375 percentage points, what is the value of the parameter D? (Round to the nearest hundredth.) Hint: Use the IS and Phillips Curves to calculate your answer.
The goal of this exercise is to illustrate the individual steps of the disinflationary process in an economy. Currently, the economy of Winterspring is in an equilibrium depicted by point Е on the graph. Suppose that Winterspring has been suffering from inflation for several years. Consequently, the individuals in this economy have developed inflationary expectations and they expect inflation to be present in the near future as well. The central bank implements a "no monetary validation" policy to reduce the inflation and to eliminate the inflationary expectations in Winterspring. In the first phase of the disinflationary process, the bank will stop monetary validation and the level of aggregate demand will be stable as shown by the AD curve. The AS curve, however, will shift as a result of the inflationary expectations in the economy. 1.) Using the three-point curve drawing tool, show the new AS curve at the end of the first phase of the disinflationary process. Label this curve AS₁.…
b. Suppose that the parameters of the monetary policy rule are r=2%, m=1/2, and the inflation target is 2%. Compute the level of the (ex-post) nominal interest rate when the inflation rate takes the following values: 1%, 0%, and -1%.
Assume that investment, government expenditures, taxes are autonomous.C = 2000 + 0.65* (Y-T)I = 900 – 50iG = 400T = 1500M = 1000P = 2L = 0.50Y-25ia.What is the value of the sensitivity money demand to the level of income?b.What is the value of the nominal supply?c.What expression represents the IS curve?d.What is the equilibrium interest rate, i*?e.What is the equilibrium income, Y*?

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