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
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
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