None The economy is characterized by the followingequations:An IS Curve Y₁ = ā- b(Rt - T)A Fisher equation: R₁ = it - Ett+1A monetary policy rule:it = +xt +m(πt - π) + E₁ πt+1A Phillips curve: π+ = Et−1πt + vỸt + §t·Where Xt is a monetary policy shock, whichmeans a change in interest rates by the Fed thatis exogenous. The rest of the notation is the sameas in 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 short-run output inpercentage points in the year 2025?

Part 2: Explanation:Step 1:First, let's use the monetary policy rule to find the short-run inflation…

Answered: The economy is characterized by the…

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter17: The Philips Curve And Expetactions Theory

Section: Chapter Questions

Problem 6SQ

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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
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.
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
In a certain economy, the Dynamic Aggregate Supply (DAS) line is represented by the function = - π₁ = Ę ₁ = ₁ π + α ( Y₁ − Ÿ) + D and the inflation expectations formation mechanism is adaptive, that is, E₁+1 Absent a supply shock (v₁ = 0), in a figure representing period t inflation rate, π, on the vertical axis, and period t output, Y₁, on the horizontal axis, the period t DAS line will pass through the pair of points, : OA. (-1) B. (α, Y) ○ C. (Y) D. (πt, Yt)
Describe how changes in expected inflation impact an economy in the wake of a temporary negative supply shock.
Consider the AD-AS model discussed during the lectures. Assume that the aggregate demand curve is given by Y=8-0.5 π, that the long run aggregate supply curve is given by Yp=7, that the short run aggregate supply curve is given by π = π_expect + 0.3(Y-Yp), and that the monetary rule is given byr=1+0.3 π. Suppose the economy is suffering a decrease in the potential level of output, due to some ill-designed new regulation. According to the AD- AS model, what is more suitable to offset the subsequent decline in output, an expansionary monetary policy or an expansionary fiscal policy?
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.
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
Consider the AD-AS model discussed during the lectures. Assume that the aggregate demand curve is given by Y = 8 - 0.5π, that the long run aggregate supply curve is given by Yp = 7, that the short run aggregate supply curve is given by π = π_expect + 0.3(Y - Yp), and that the monetary rule is given by r = 1 + 0.3π. a) What is the economic interpretation behind the aggregate demand curve? Why is it negatively sloped? If you consider point A=(π,Y)=(3, 6.5) and point B=(π,Y)=(5, 5.5), is monetary policy more expansionary in point A, in point B, or neither? Are you referring to the exogenous or to the endogenous stance of monetary policy?
Assume that inflation falls significantly below expectations. Diagram both the short-run and long-run effects on employment using a Phillips Curve diagram. What changes in this model to allow the return to longrun equilibrium?
a) Consider an AD-AS model with Static Expectations. Show how changes in monetary policy generate short-run movements in output. (b) Consider an AD-AS model with Rational Expectations. Show how changes in the unanticipated component of monetary policy generate short-run movements in output. (c) Explain how overlapping wage contracts generate persistence in output when there are monetary policy shocks.
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.…

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