Consider the IS-LM AD-AS model (with adaptive expectations). Assume that the economy is initially in a long-run equilibrium where output is at its natural level and prices are as expected by workers. (b) What is the impact of an increase in the money supply on the evolution over time of the interest rate, the output level and the price level. Carefully explain the economics behind these dynamics. In the long-run, does the in- crease in the money supply have any real (as opposed to nominal) effect on the economy?
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- Consider the IS-LM AD-AS model (with adaptive expectations). Assume that the economy is initially in a long-run equilibrium where output is at its natural level and prices are as expected by workers. (c) What is the impact of an adverse supply shock which forces firms to increase their markups on the evolution over time of the interest rate, the out- put level and the price level. Carefully explain the economics behind these dynamics. What is the long term effect of the adverse aggregate supply shock on the level of output?QUESTION 19 Which of the following is not true for the IS/LM model? Interdependency between the goods and money markets Keynesian demand-side model Interest rates are a function of investment O Fixed price, short-run model QUESTION 20 In terms of the AD/AS model, the Covid-19 pandemic caused a demand-side shock only, with a fall in aggregate demand supply-side shock only, with a fall in aggregate supply impossible to say demand-side and a supply-side shock, with falls in aggregate demand and aggregate supplyConsider a closed Keynesian economy and assume the economy is initially in general equilibrium. a) If the central bank sells government bonds in the market how would the real interest rate be affected in the short run? Explain and demonstrate using the asset market equilibrium graph. b)Explain how market with respond in long and short run using IS-LM-FE model and the AD Curve to part a)
- Consider the classical AS-AD model with misperceptions. Assume that the economy is initially at its general equilibrium. Now, suppose the central bank considers an increase in the nominal money supply that is not anticipated by households or firms. a. How does the misperception theory work? b. Which of the three markets is first affected (labor, goods, or asset market)? Explain and show graphically how this market is affected by an unanticipated increase in the nominal money supply. c. Use the classical version of the AS-AD model with misperceptions to explain and to show graphically how an unanticipated increase in the nominal money supply affects the short-run equilibrium. d. Use the classical version of the AS-AD model with misperceptions to explain and to show graphically how an unanticipated increase in the nominal money supply affects the long-run (general) equilibrium.Consider the classical AS-AD model with misperceptions. Assume that the economy is initially at its general equilibrium. Now, suppose the central bank considers an increase in the nominal money supply that is not anticipated by households or firms. b. How does the misperception theory work? c. Which of the three markets discussed in class is first affected (labor, goods, or asset market)? Explain and show graphically how this market is affected by an unanticipated increase in the nominal money supply.Suppose the economy is initially in its long-run equilibrium. Due to the biased (overestimated) expectation of return, the entrepreneurs overwhelmingly become much more aggressive in investment holding other things equal. a. Use the IS-LM model and AD-AS model to graphically illustrate the impact of the biased expectation in the short run and in the long run. What are the changes in the equilibrium real interest rate, output, and prices? b. If the central bank wants to offset the impact of the biased expectation, what is the appropriate measure? Draw a graph as in part a. for illustration. What are the changes in the equilibrium real interest rate, output, and prices in this case?
- Consider the following short-run IS-LM model. Assume the central bank targets the nominal interest rate and expected inflation is zero. C = 300 + .50YD I = 1000 + .10Y – 5000i G = 700 T = 600 M/P = 100 + .25Y - 6250i P = 1 i = .06 Y-T = YD Solve for the IS equation and the LM equation. Find the equilibrium and also show it on a graph of IS-LM. Find the equilibrium values for C, I, and the money supply M. Consider a fiscal stimulus: what is the impact on Y if G rises by 100? What is the impact on I in this case? What is the impact on the interest rate and the money supply? Return to your original analysis. Consider a monetary stimulus where the central bank sets a new target interest rate, i = .04. Find the new equilibrium values for Y, C, and I. Find and discuss any change in the money supply. What causes the change in I in this case? Explain.Use the IS-LM model to describe the short-run effects of an increase in the money supply on the equlibrium output and real interest rate. Assuming the economy is in a long-run equilibrium before the shock, also explain how the price level changes over time, and what happens to the economy in the long-run. Use the AS-AD framework for this part of the question. Add diagrams to illustrate the answer - you can use the attachment feature of the answer editor to upload your chart.Supposed the economy is faced with persistently rising prices and there is a real threat of a worsening inflation. What specific actions/policy can the Central Bank implement to curb this threat and why? Based on the IS-LM model, if the Central Bank does this, which curve will shift and in what direction? Predict the effects of the Central Bank action on the following: Income: ________________ Interest Rate: ____________ Consumption: ___________ Investment: ______________
- Using the macro model we learned in this class (MP-IS and AD-AS framework) consider the current crisis. 1. Identify the basic impacts of the Covid shutdowns on the macro economy. Explain how and why each curve will be affected. Graphically show your analysis. 2. Consider the monetary policy responses to the current crisis. Develop separate analysis for an economy which have positive policy rates vs an economy which is at the zero lower bound. Would it require different monetary policies? If so how? What would you expect to happen to the inflation rate, unemployment rate, economic growth in the near future? Use graphs for each case.4. Consider the ASAD model of a closed economy with zero ongoing inflation and workers misperceptions. Firms are perfectly competitive, produce output with diminishing marginal returns to labour and have perfect foresight over the price level. Workers, instead, expect zero inflation in each period. At time zero, the economy is in the potential equilibrium. There is a negative shock on aggregate demand – for example, a permanent fall in desired autonomous consumption at time t = 1. What are the effects of the shock on the equilibrium real wage in the short and in the medium run? Describe (at least in words, and even better in a diagram) the entire time path of the real wage from before the shock to the medium-run equilibrium. Prove your statements formally – for example, use the diagram of the labour market where you measure the real wage on the vertical axis, and distinguish the very short run (the temporary equilibrium at time t = 1) from the medium run. Carefully explain the…(The Cagan Model and Output Growth). Suppose that the demand for money is given by Pt 1+it where M is the nominal demand for money, P, is the price level, Y, is real output, and iç is the nominal interest rate, in period t. Suppose that people have rational expectations. Suppose further that Y, grows at 3 percent, that Yo percent, that Mo = 100, and that the real interest rate, denoted r, is constant and equal to 4 percent. = 1, that the nominal money supply, denoted Mt, grows at 5 Mt 1. Guess the equilibrium growth rate of the real money supply, and explain why you Pt think your Pt guess makes sense. Let t = Pt+1 1 be the inflation rate in period t. Given your guess, what is the inflation rate in periods 1, 2, 2. Given your guess, use the Fisher equation to calculate the nominal interest rate, i,, in periods t = 0, 1, 2, . . . Check whether your guess is correct, that is, check whether, given your guess, the real demand for money, 1+i Mt grows at the same rate as the real money…