Consider an economy with an upward-sloping aggregate supply curve given by: Y = Y + (n – n*) where Y is the full-employment output, r is inflation, and r" is producers' expectations of the inflation. A policy-maker wishes to enact monetary policy to achieve a target level of output and inflation given by {Y*,"*), subject to Y >9. 1. inflation target is and the policy-maker cares twice as much about increasing output as decreasing the inflation rate." Write down (do not solve) the policy-maker's objective function if the optimal
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- Suppose an economy for which the Dynamic Aggregate Supply in period t is given by the equation: + 12 (Y₁₂ - Y). π₁ = πⓇ where is the inflation target set by the monetary authority and Y the potential or long-run equilibrium of output. Which of the panels below contains the correct graphical representation of this DAS? (go to full screen to see all the panels at once) A Tit 1 TT + # Ý DAS-1 B TL πt 1 Y DAS-1 Y₁Suppose a country has a money demand function (M/P)ª = kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. a. What is the average inflation rate? b. How would inflation be different if real income growth were higher? Explain. c. How do you interpret the parameter k? What is its relationship to the velocity of money? d. Suppose, instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain.Consider in a country A: money supply M=3000, price level P=3, inflation expectation andliquidity preference is assumed to be zero to make the calculation simple. The money demandfunctionL(i,Y) =Y−200∗(r+πe). Consumption C=300+0.8*(Y-T)-20*r, investment functionis I=700-80*r, government spending and tax are both 500. (1) Solve the real interest rate and the real GDP in equilibrium. (2) If government spending and tax both increases by 150 to keep the government budgetbalance, what is the new equilibrium real interest rate and the new equilibrium real GDP.
- Q1 [Inflation in a monetary OLG model] Consider an overlapping generations model in which individuals live for two periods, young and old. The economy begins in period 1, when there are NO numbers of the initial old. In each period t 2 1, Nt young individuals are born, where Nt = nNt-1 and n>1. There is only one good in this economy. The good cannot be stored from one period to the next. In each period, each young individual is endowed with y units of the consumption good and old individuals have zero endowment. The young generations' preference can be expressed use the following utility function: u(c1,t, c2,t+1) = log(c1,t) + B log(c2,t+1) Members of the initial old generation only live for one period and have utility u(co,1) = logc0,1. In this economy, individuals can use fiat money to facilitate trades between different generations. Assume the stock of fiat money M grows at a constant rate y, i.e., Mt = yMt-1, where y >1. The money created each period is used to finance a lump- sum…Which of the following is true of Advantages of the US implicit Nominal Anchor? Select one: a. The Fed’s forward-looking behavior and stress on price stability also help to discourage overly expansionary monetary policy, thereby ameliorating the time consistency problem. b. It does not enable monetary policy to focus on domestic considerations. c. It relies on a stable money-inflation relationship. d. None of the aboveC = 100 + 0.5 - (Y –Ť) I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are G = 500, Î= 100. The LM (money market equilibrium) curve is Y where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to = 0.05. 1. Explain how the long-run values of (r, i) are determined before the vaccine news shock. 2. Which, if any, of the graphs from Appendix A best depicts the long-run change in the interest rate(s) due to the vaccine news shock? Explain. 3. Explain how the long-run values of (Y, P) are determined before the vaccine news shock. Appendix A Graphs for Q1.2 and Q2.3 Real Real Ierest Ireresa Rate Rate Ir) Tir)…
- C = 100 + 0.5 - (Y – T) I = 200 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are G= 300, Ť= 200. The LM (money market equilibrium) curve is M Y 10i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 2000 units of money, and expected inflation is a“ = 0.02. Assume that the long-run equilibrium level of output is Y = 1000. Short-run equilibrium output is initially at the same level (Y = 1000). Suddenly, news of a new world-beating super-vaccine raises the investment function to I = 250 – 1000 -r Question 1 Derive the long-run equilibrium values of output Y, consumption C, private and public savings Sprivate and Spublie, investment I, the real and nominal interest rates (r, i) and price P, before and after the vaccine news shock. In particular: 1. Explain how the long-run values of (r, i) are determined before the vaccine news shock. 2. Which, if any, of the graphs from…3. Suppose the monetary policy curve is given by r = 1.5 +0.75 , and the IS curve is given by Y = 13- a) Find the expression for the aggregate demand curve. b) Calculate aggregate output when the inflation rate is at 2%, 3%, and 4%. c) Plot the aggregate demand curve and identify the three points from part (b).The central bank minimizes a loss function (L), where the government requires it to keep next period's inflation close to the target whilst avoiding large output fluctuations: L=(y1-y+B (T1- a Discuss the critical parameter in the central bank's loss function. i. 11. Identify and explain the central bank's constraint. Show that the monetary rule is (yı- y.) =-a BaI- a'). Derive the central bank's Interest- rate Rule (IR equation) based on the stabilizing interest 111. iv. rate.
- Suppose the monetary policy curve is given by r = 1.5 + 0.757, and the IS curve is given by Y = 13 – r. a) Find the expression for the aggregate demand curve. b) Calculate aggregate output when the inflation rate is 2%, 3% and 4%. c) Plot the aggregate demand curve and identify the three points from part (Ъ). d) What would be the effect on the aggregate demand curve of an increase in net export? Would an increase in net exports affect the monetary policy curve? Explain why or why not.C = 100 + 0.5 - (Y – T') I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, Ť = 100. The LM (money market equilibrium) curve is Y 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to = 0.05. Question 5 Suppose that consumers finally decide to get rid of cash altogether, and only use debit cards. Nothing else changes, and the CB doesn't do anything either. What do you think will happen to money supply M and prices P in the short and long-runs? Does this change money demand?C = 100 + 0.5 · (Y – T) I = 500 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T = 100. The LM (money market equilibrium) curve is MY P 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to = 0.05. 1. Suppose the government (not the CB) wants to stabilise the shock in the short-run. Explain whether it should increase the government deficit (AĞ > AT) or reduce it (AĞ < AT), and how it works. 2. Now suppose the government doesn't do anything, and the CB wants to stabilise the shock in the short-run. Explain whether it should decrease or increase money supply M if it wants to bring output Y back to…