Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Chapter 15, Problem 1PA
To determine
The long-run equilibrium for the dynamic AD‑AS model.
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Consider a standard AD-AS model.
The economy is affected by the following sequence of events. In period 1 there is a shock to the economy that is temporary. In period 2, the shock ends. But having observed an inflation outcome different to the inflation target, inflation expectations change from the inflation target to a value exactly equal to the observed inflation in period 1 (that is, expectations are not `anchored’).
A temporary positive demand shock would lead to output above potential in period 1, but below potential in period 2.
Answer true or false. Please briefly explain your answer.
Suppose the Phillips curve is
and the Aggregate Demand curve is
Tt = Tt1+3ytot
Yt = at 5(πt - 0.02)
where at = Ot = 0 in the steady state.
(a) Calculate the steady state values of output and inflation in this economy.
(b) Calculate the short- and long-run responses of the economy to the following shocks (use a
table to report your answers, as well as show them graphically on the AD-AS graph, as well
as plot inflation and output against time):
(1) A one-time decrease in ot to -0.05.
(2) A one-time increase in at to 0.05 (at returns to 0 thereafter).
(3) A permanent decrease in the Fed's inflation target from 0.02 to 0.
Thank you so much for your time and effort! Please note that this is a multi part quesition!
Figure 2: Keynes’s AD-AS Model (Image normally goes here)
Part 1:Changes in which factors could cause aggregate demand to shift from AD to AD1? What could happen to the unemployment rate? What could happen to the inflation rate?
Part 2: The Keynesian AD-AS model describes what happens with price levels when aggregate demand increases. Could you find any evidence from the last ten-fifteen years that might support AD-AS model descriptions of demand-pull inflation, cost-push inflation, and recession? For example, you could find data on the GDP’s of any two countries from 2000 to 2017 to support your findings.
Please note the followong for the next 3 parts of this. In macroeconomics, the immediate short run is known as a length of time when both input prices and output prices are fixed. In the short-run, input prices are fixed but output prices are variable. In the long run, input prices and…
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- Two potential causes of inflation above target in the AD-AS model: Demand-pull inflation: This occurs when aggregate demand (AD) increases more than the long-run aggregate supply (LRAS). In the AD-AS diagram, this would be represented by a rightward shift of the AD curve. The result is a higher price level and real GDP beyond the long-run macroeconomic equilibrium level. Cost-push inflation: This occurs when the short-run aggregate supply (SRAS) curve shifts to the left due to increased production costs, such as rising wages or input prices. In the AD-AS diagram, this would be represented by a leftward shift of the SRAS curve. The result is a higher price level and a reduction in real GDP. how do i graph this information in an ad-as diagramarrow_forwardDraw and properly label an AD-AS model to show Keynesian, intermediate, and neoclassical zones (6%). Then, briefly explain the levels of unemployment, inflation and real GDP in each zone, and confirm whether or not goals of a macro economy are being achieved in each zone. (14%)arrow_forwardUse a standard dynamic AS-AD model to explain how the macroeconomy adjusts following a favourable supply shock (vt < 0) for one period which reverts to zero for all subsequent periods. Assume that the economy starts from its long-run equilibrium. As a reminder, the DAD and DAS curves, respectively, are provided below: Y =Y - αθη 1+aly Tt = t_1+ ¢(Y - Y)+v where Y is output, πt is inflation, 0 and Oy capture the responsiveness of the central bank to inflation and output, a is the sensitivity of output to the real interest rate and is the sensitivity of inflation to the output gap. Y is the natural output level, and π* is the central bank's inflation target. [Hint: It will be helpful to work this question out using diagrams, but you are not required to provide them as part of your solutions.] -(πt - π* π*) + 1+aly Et A. (2 points) Explain the impact effect of this shock on output, inflation, and the real interest rate. B. (3 points) Explain the dynamic response of output, inflation, and…arrow_forward
- Consider the AD-AS model. Assume the aggregate demand curve is given by Y= 8-0.5n, that the long run aggregate supply curve is given by Yp = 7, that the short run aggregate supply curve is given by n =n_expect + 0.3(Y - Yp), and that the monetary rule is given by r= 1+0.3n A) What is the economic interpretation behind the aggregate demand curve? Why is it negatively sloped? If you consider point A=(n,Y}=(3, 6.5) and point B={n,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? B) Suppose the economy is in equilibrium at the potential level of output, with inflation expectations equal to actual inflation, which equals 2%. A financial crisis hits the economy. Use the model to interpret what happens in the short run and in the long run if the central bank does not intervene exogenously with an expansionary monetary policy. C) According to the AD-AS model, what is more…arrow_forwardDraw and properly label an AD-AS model to show Keynesian, intermediate, andneoclassical zones (6%). Then, briefly explain the levels of unemployment, inflationand real GDP in each zone, and also confirm whether all three goals of a macroeconomy are being achieved in each zone. (14%)arrow_forwardUsing the data in the table, integrate the expected relationship of the behavior of inflation with the phases of the economic cycle. You must use the different levels of inflation rate with economic growth and construct graphs to present your analysis arguments.arrow_forward
- Using the data in the table, integrate the expected relationship of the behavior of inflation with the phases of the economic cycle. You should use the different levels of inflation rate with economic growth and construct graphs to present your analysis arguments.arrow_forwardConsider 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. b) Suppose the economy is in equilibrium at the potential level of output, with inflation expectations equal to actual inflation, which equals 2%. A financial crisis hits the economy. Use the model to interpret what happens in the short run and in the long run if the central bank does not intervene exogenously with an expansionary monetary policy.arrow_forwardIn long run macroeconomic models the effects of exogenous shocks, price rigidities and expectational errors are fundamental ingredients. True or Falsearrow_forward
- 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?arrow_forwardConsider the AS/AD model. The AS curve is: Y, = a – bm(r, - 7) and the AD curve is: Thy = T-1 + DỸ, +ō. where r is inflation and Y is short-run output. The subscript t indexes time. ī = 0.01,0 = 0.02, ā = 0.04, b = 0.05, and m = 0.04 are fixed strictly positive parameters. Assume the inflation target is 0.02 (or 2%). Calculate Y at the steady state. (If you answer is 3%, do not put the percentage sign enter 3 or 0.03).arrow_forwardConsider 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?arrow_forward
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