The economy is characterized by the following equations: An IS Curve Y₁ =ā – b(Rt — σ) - A Fisher equation: R₁ = it - E₁πt+1 A monetary policy rule: it = F +Xt +m(πt − π) + Еtπt+1, - A Phillips curve: π₁ = Et−1πt +vŸt + St. Where Xt is a monetary policy shock, which means a change in interest rates by the Fed that is exogenous. The rest of the notation is the same as in class. The economy has been in the long-run equilibrium. Xt is zero in the long-run. You will need the following values for some parameters: v=1, m = 3, b = 1, π = 2% Suddenly, in a year we will call 2025, the Federal Reserve decides out of the blue to lower interest rates by 1 percentage point. That is X2025 = -1%. In the year 2026, X2026 = 0. What is the value of short-run output in 2026? You need to enter your answer using a number. If, for example, your answer is 1%, then you need to enter 0.01.

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

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.

Suppose an economy for which the Dynamic Aggregate Supply in period t is given by the equation: + 12 (Y₁₂ - Y). π₁ = πⓇ where is the inflation target set by the monetary authority and Y the potential or long-run equilibrium of output. Which of the panels below contains the correct graphical representation of this DAS? (go to full screen to see all the panels at once) A Tit 1 TT + # Ý DAS-1 B TL πt 1 Y DAS-1 Y₁

Suppose an economy is characterized by the following three equations: where the first equation is an aggregate-supply function written in the form of an expectations-augmented Phillips curve, the second is an IS or aggregate-demand relationship, and the third is a money-demand equation, where ∆m denotes the growth rate of the nominal money supply. The real interest rate is denoted by r and the nominal rate by i, with Let the central bank implement policy by setting i to minimize the expected value of  Assume that the policy authority has forecasts ef , uf , and vf of the shocks but that the public forms its expectations prior to the setting of i and without any information on the shocks. a. Assume that the central bank can commit to a policy of the form prior to knowing any of the realizations of the shocks. Derive the optimal commitment policy (i.e., the optimal values of c0, c1, c2, and c3). b. Derive the time-consistent equilibrium under discretion. How does the…

An economy has the following equation for the Phillips Curve: π = Eπ − 0.5(u − 6)People form expectations of inflation by taking a weighted average of the previous two years of inflation: Okun’s law for this economy is: Eπ = 0.7π−1 + 0.3π−2 (Y −Y−1)/(Y-1)=3.0−2.0(u−u−1) Th economy begins at its natural rate of unemployment with a stable inflation rate of 5 percent. 1. What is the natural rate of unemployment for this economy?  2. Graph the short-run tradeoff between inflation and unemployment that this economy faces. Label the point where the economy begins as A.  3. A fall in aggregate demand leads to a recession, causing the unemployment rate to rise 4 percentage points above its natural rate. On your graph, label the point the economy experiences that year as point B.

The following graph plots the short-run and long-run Phillips curves (SRPC and LRPC, respectively) for an economy currently experiencing long-run macroeconomic equilibrium at point A, where the natural unemployment rate is 6% and the inflation rate is 8% per year. Suppose that the central bank for this economy has decided that inflation is too high and thus wants to decrease the inflation rate by 6 percentage points per year. A reduction in the rate of inflation is known as  (deflation/disinflation)  . To reduce inflation from 8% to 2% in the short run, the central bank would have to accept an unemployment rate of ____%   True or False: If people have rational expectations, the economy may not have to endure an unemployment rate as high as predicted by the short-run Phillips curve.   -True   -False

Describe the concept of an accelerationist Phillips Curve and how it manifests as an empirical relationship in macroeconomic data (if you want to show data, you may choose any country). Evaluate the role and significance of inflation expectations for an accelerationist Phillips Curve.

Consider the AD-AS model: Y = Y* ay (π = π*) + ED ㅠ π = π² + 08 (Y-Y*) + €s Suppose the parameter values are a = = 0.02 0.5, y = 2, p = 0.5, B = 2 with inflation target * and natural output normalized to Y* = 1. Suppose the economy begins in an initial long run equilibrium.

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, :