4. Oil price shocks. Suppose the economy is initially at a medium-run equilibrium (defined by Y₁, Un, and rn). Consider the effect of a rise in oil prices, modelled as a rise in firm markups (m). As we move from a medium-run equilibrium to a short-run equilibrium (caused by the increase in m), i. ii. iv. V. Demonstrate, using a figure, the effect on the WS and PS curves. How does this affect the natural rate of unemployment? vii. What is the effect, in the short run, on nominal wages (W), prices (P), real wages (W/P), and price expectations (P)? Demonstrate, using a figure, the short-run effect on the PC relation. If the economy is to return to having a zero output gap, how must the central In the new medium-run equilibrium, how does equilibrium output and the level of inflation compare to that in the initial medium-run equilibrium? What do we call this phenomenon? vi. Now suppose that the rise in oil prices also had a direct (adverse) effect on firm investment: let firm investment be defined by I(Y,r+x,m), where investment is decreasing in firm markups. Demonstrate, using figure(s), the short-run effect on both the PC relation and the IS curve. Be careful when depicting the possible cases for the level of short- run equilibrium output and its relation to medium-run equilibrium potential output - there will be multiple cases, depending on the relative shifts to the PC and IS curves. If the economy is to return to having a zero output gap, how must the central bank adjust the real interest rate?
4. Oil price shocks. Suppose the economy is initially at a medium-run equilibrium (defined by Y₁, Un, and rn). Consider the effect of a rise in oil prices, modelled as a rise in firm markups (m). As we move from a medium-run equilibrium to a short-run equilibrium (caused by the increase in m), i. ii. iv. V. Demonstrate, using a figure, the effect on the WS and PS curves. How does this affect the natural rate of unemployment? vii. What is the effect, in the short run, on nominal wages (W), prices (P), real wages (W/P), and price expectations (P)? Demonstrate, using a figure, the short-run effect on the PC relation. If the economy is to return to having a zero output gap, how must the central In the new medium-run equilibrium, how does equilibrium output and the level of inflation compare to that in the initial medium-run equilibrium? What do we call this phenomenon? vi. Now suppose that the rise in oil prices also had a direct (adverse) effect on firm investment: let firm investment be defined by I(Y,r+x,m), where investment is decreasing in firm markups. Demonstrate, using figure(s), the short-run effect on both the PC relation and the IS curve. Be careful when depicting the possible cases for the level of short- run equilibrium output and its relation to medium-run equilibrium potential output - there will be multiple cases, depending on the relative shifts to the PC and IS curves. If the economy is to return to having a zero output gap, how must the central bank adjust the real interest rate?
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
Chapter10: Dynamic Change, Economic Fluctuations, And The Ad-as Model
Section: Chapter Questions
Problem 12CQ
Related questions
Question
Only answer v, vi, vii please
Transcribed Image Text:4. Oil price shocks.
Suppose the economy is initially at a medium-run equilibrium (defined by Y, un, and ra).
Consider the effect of a rise in oil prices, modelled as a rise in firm markups (m). As we move
from a medium-run equilibrium to a short-run equilibrium (caused by the increase in m),
Demonstrate, using a figure, the effect on the WS and PS curves. How does this
affect the natural rate of unemployment?
What is the effect, in the short run, on nominal wages (W), prices (P), real wages
(W/P), and price expectations (P*)?
i.
ii.
iii.
Demonstrate, using a figure, the short-run effect on the PC relation.
If the economy is to return to having a zero output gap, how must the central
iv.
In the new medium-run equilibrium, how does equilibrium output and the level
of inflation compare to that in the initial medium-run equilibrium? What do we
call this phenomenon?
Now suppose that the rise in oil prices also had a direct (adverse) effect on firm investment:
let firm investment be defined by I(Y,r+x,m), where investment is decreasing in firm markups.
vi.
Demonstrate, using figure(s), the short-run effect on both the PC relation and
the IS curve. Be careful when depicting the possible cases for the level of short-
run equilibrium output and its relation to medium-run equilibrium potential
output – there will be multiple cases, depending on the relative shifts to the PC
and IS curves.
vii.
If the economy is to return to having a zero output gap, how must the central
bank adjust the real interest rate?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step 1: Define oil price shock
VIEWStep 2: Compare the medium term equilibriums as oil price increase effect
VIEWStep 3: Explain the adverse effect on firms investment on PC relation and IS curve
VIEWStep 4: Explain how the central bank adjust real interest rate to have zero output gap
VIEWSolution
VIEW
Step by step
Solved in 5 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Economics: Private and Public Choice (MindTap Cou…
Economics
ISBN:
9781305506725
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
Macroeconomics: Private and Public Choice (MindTa…
Economics
ISBN:
9781305506756
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours…
Economics
ISBN:
9781337091985
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Economics: Private and Public Choice (MindTap Cou…
Economics
ISBN:
9781305506725
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
Macroeconomics: Private and Public Choice (MindTa…
Economics
ISBN:
9781305506756
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours…
Economics
ISBN:
9781337091985
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Essentials of Economics (MindTap Course List)
Economics
ISBN:
9781337091992
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Principles of Economics, 7th Edition (MindTap Cou…
Economics
ISBN:
9781285165875
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning