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What is the economic justifcation for the sticky infation assumption? What
role does this assumption play in the short-run model?
Sticky inflation refers to a situation when there is high and constant inflation rate in the economy along with stagnant growth. Such a situation is undesirable for the economy.
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- How does an autonomous tightening or easing ofmonetary policy by the Fed affect the aggregate demandcurve?in the Lucas Imperfect Information model, do aggregate demand shocks have real affects? Explain. What is the implication of this result for stabilisation policy?If the money supply curve is upward-sloping, the technical term for the money supply is: a) Inelastic b) Unstable c) Endogenous d) Exogenous
- Does the sole focus on infation mean that the central bank doesn’t careabout short-run output in some sense?if the FED mailed everyone a brand new $100 bill, what would happen to prices, income and output in the short run? (Hint: AD&AS Model) And, in the long run? (Hint: Equation of Exchange).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?
- Explain and demonstrate graphically the effects of a negative supply shock in both the short-run and long-run. (Hint: Use AD-AS framework)Please only answer part D (I already have part a, b, and c) In the New Keynesian model, suppose that in the short run the central bank cannot observe aggregate output or the shocks that hit the economy. However, the central bank would like to come as close as possible to economic efficiency. That is, ideally the central bank would like the output gap to be zero. Suppose initially that the economy is in equilibrium with a zero-output gap. (a) Suppose that there is a shift in money demand. That is, the quantity of money demanded increases for each interest rate and level of real income. How well does the central bank perform in relative to its goal? Explain using diagrams. (b) Suppose that firms expect total factor productivity to increase in the future. Repeat part (a). (c) Suppose that total factor productivity increases in the current period. Repeat part (a). (d) Explain any differences in your results in parts (a)–(c) and explain what this implies about the wisdom of following an…In the New Keynesian model, suppose that in the short run the central bank cannot observe aggregate output or the shocks that hit the economy. However, the central bank would like to come as close as possible to economic efficiency. That is, ideally the central bank would like the output gap to be zero. Suppose initially that the economy is in equilibrium with a zero-output gap. (a) Suppose that there is a shift in money demand. That is, the quantity of money demanded increases for each interest rate and level of real income. How well does the central bank perform in relative to its goal? Explain using diagrams. (b) Suppose that firms expect total factor productivity to increase in the future. Repeat part (a). (c) Suppose that total factor productivity increases in the current period. Repeat part (a). (d) Explain any differences in your results in parts (a)–(c) and explain what this implies about the wisdom of following an interest rate rule for the central bank. Problem 6 assumes that…
