Answered: Why does aggregate demand not depend on…

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 8CQ

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Question

Suppose that in a small open economy exchange rates are fixed. The AD and AS curves are given by:
AD:Y =110+2G−T−10π

AS:Y =105+10(π−π ̄)
where Y is output, G is government spending, T is taxes, π is inflation and π ̄ is core inflation.
Why does aggregate demand not depend on monetary policy?

What is the natural rate of output?

Suppose we are at the long run equilibrium. Suppose also that the government is running a balanced budget and world inflation is equal to 1. What are the values of G, T, Y, π and π ̄?

If the government sets both G and T to 10, what will happen to Y and π in the short run?

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