interest rate to inflation) and a small value for 0_Y (the responsiveness of the nominal interest rate to output) then the Dynamic Aggregate Demand curve will be relatively and supply shocks will have a relatively impact on inflation than output. [You may assume that 0_ and _Y are both greater than zero].
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- Assume, while an economy is in long-run equilibrium, an adverse supply shock occured, suchas energy prices have incrased. The central bank decides to accommodate this shock and restores theequilibrium quickly. What would be the effect of this policy action on inflation? Explain and illustratewith the help of an AD-AS diagram.As monetary policymakers become more concernedwith inflation stabilization, the slope of the aggregatedemand curve becomes flatter. How does the resulting change in the slope of the aggregate demand curvehelp stabilize inflation when the economy is hit with atemporary negative supply shock? How does this affectoutput? Use a graph of aggregate demand and supply todemonstrate.1) Inflation in Theoretica is currently below the target range of its central bank. What does this tell you regarding Theoretica’s likely output gap? Illustrate it using an AS-AD diagram, and briefly explain your diagram 2) Your mother states that lowering interest rates in the recessionary COVID-19 period is good policy because it will guarantee consumers will spend more as it is cheaper to borrow money. Do you agree or disagree with her statement? Provide two reasonings to justify your answer. 3) Is either helicopter money or quantitative easing preferred in times of severe recessions in order to boost economic activity? Explain your reasoning.
- The economy begins in longcrun equilibrium. Thenone day, the president appoints a new chair of theFederal Reserve. 11\is new chainnan is well known forher view that inflation is not a major problcn1 for aneconomy.a. How would this news affect the price level thatpeople would expect to prevail?b. How would this change in the expected pricelevel affect the nonlinal wage that workers andfmn.s agree to in their new labor contracts?c. How would this change in the nonlinal wageaffect the profitability of producing goods andservia,s at any given price level?d. How docs this change in profitability affect theshort-run aggregate-supply curve?e. ff aggregate demand is held constant, how docsthis sllift in the aggregate-supply curve affect theprice level and the quantity of output produced?f. Do you think this Fed chainnan was a goodappointment?Refer to the accompanying figure. LRAS Inflation a A 0, y' Output O O An economy is currently in long-run equilibrium at point B, at an inflation rate of m, which is too high to sustain economic growth. If an anti-inflationary policy is enacted, the economy will be in short-run equilibrium at point creating gap. O SRAS O SRAS AD' AD A; an expansionary A; a recessionary D; a recessionary D; an expansionaryIn the basic New Keynesian model, suppose that there is an increase in government spending. • First, suppose that the central bank does nothing (accommodates the shock). Illustrate onthe graphs and explain what will be the effects on inflation and output? • Second, suppose that economy initially has inflation equal to the central bank’s inflationtarget and an output gap of zero. What action do you expect the central bank wouldundertake? Illustrate you answer on the graph and explain. PLEASE SHOW ALL HAND WRITTEN STEPS AND WORK!
- If large budget deficits cause the public to think therewill be higher inflation in the future, what is likely tohappen to the short-run aggregate supply curve whenbudget deficits rise?Consider the AD/AS model below with a constant rate of inflation. No exogenous AD or AS shocks are occurring. Price Level P3 2 Po 0 FIGURE 29-1 Y" E3 E2 E1 Eo Real GDP AS3 AS2 AS1 ASO AD3 AD2 AD1 ADO Select one: O a an annual shift upward of the AS curve by 3%. b. an annual increase in the inflation rate of 3%. Oc. an annual shift upward of the AD curve by 3%. d. an annual increase in the equilibrium price level of 3%. Oe. Not applicable. The diagram shows the price level, not the inflation Refer to Figure 29-1. A constant rate of inflation of 3% is portrayed in an AD/AS diagram like this one asSuppose the public believes that a newly announcedanti-inflation program will work and so lowers itsexpectations of future inflation. What will happen toaggregate output and the inflation rate in the short run?
- Suppose two countries have identical aggregate demandcurves and potential levels of output, and g is the samein both countries. Assume that in 2019, both countriesare hit with the same negative supply shock. Given thetable of values below for inflation in each country, whatcan you say, if anything, about the credibility of eachcountry’s central bank? Explain your answer.Country A Country B2018 3.0% 3.0%2019 3.8% 5.5%2020 3.5% 5.0%2021 3.2% 4.3%2022 3.0% 3.8%Suppose the president gets Congress to pass legislationthat encourages investment in research and the development of new technologies. Assuming this policy leadsto a positive productivity change for the U.S. economy,use aggregate demand and supply analysis to predictthe effects on inflation and output. Demonstrate theseeffects on a graph.There is currently a political and academic controversy whether or not stimulus packagesagainst the Covid-induced economic recession will cause inflation. Professor OlivierBlanchard has warned that the stimulus package of the US-administration may lead toinflation in the US. However, he does not see inflation dangers emanating from stimulusprograms in the Eurozone. The Next Generation EU program is not only considered to be a stimulus program but also tobe a growth program, which by spending on infrastructure and climate-related investmentsis expected to lead to an increase in potential output.Analyze in an AD-AS model the impact of economic growth on actual GDP and the pricelevel. Also elaborate on the role that an additional demand stimulus could play.