ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Question

Chapter 10, Stabilization Policy with Different Objectives  Think about two separate Federal Reserves- Fed A and Fed B. Fed A cares only about keeping the price level stable at ¯ P and Fed B cares only about keeping output and employment at their natural levels ¯ Y. Let long-run aggregate supply (LRAS) be a function of capital and labor, Y = F(K,L), short-run aggregate supply (SRAS) be a characterized by completely sticky prices at ¯ P, and aggregate demand (AD) characterized byY = MV P . Let each Fed have control over nominal money balances M. (a) Assume both economies are currently at the long run equilibrium. Draw the long-run aggregate supply, short-run aggregate supply, and aggregate demand in equilibrium. Howwould each Fed respond both in the short-run and in the long-run to the follow ing two scenarios? (b) An exogenous permanent decrease in the velocity of moneyV ↓. (c) An exogenous temporary increase in the price of oil ¯ P ↑. In other words, oil prices return to the intersection of the demand curve and the long run supply curve in the long run

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