Consider a standard AD-AS model. The economy is affected by the following sequence of events. In period 1 there is a shock to the economy that is temporary. In period 2, the shock ends. But having observed an inflation outcome different to the inflation target, inflation expectations change from the inflation target to a value exactly equal to the observed inflation in period 1 (that is, expectations are not `anchored’). A temporary positive demand shock would lead to output above potential in period 1, but below potential in period 2. Answer true or false. Please briefly explain your answer.

Consider the short-term model characterized by the following AS and AD curves: Ý, = à – bm(x, – ñ) (AD] and A; = x; + vỶ, + õ, (AS). The economy is in steady state at time t = -1 (that is, a-1 = ñ, ō-1 = 0, and ā = 0). It is hit by a one-time inflation shock öy = .025 at time i = 0. For now, expectations are adaptive: 7 = ,-1. You'll use the answer to this question in several follow-up questions. To keep track of your results, you should use a spreadsheet application. If you don't already have one, you can use this hyperlinked template e (it's a Google Sheet). Calculate zo assuming b = 0.5, m = 2, ñ = 0.03, and ū = 1. Enter your answer as a percentage and round to the nearest hundredth.

Complete the following table to compare the results of an unanticipated expansionary policy to those of an anticipated expansionary policy in the short run and long run. Determine whether, in the short run, the level of output increases, decreases, or remains unchanged relative to the potential output level when the expansionary policy is anticipated versus unanticipated. Additionally, determine whether, in the long run, the actual price level is above, below, or the same as initial expectations under both scenarios, and, again, determine whether the level of output increases, decreases, or remains unchanged.   Anticipated Expansionary Policy Unanticipated Expansionary Policy Short-Run Change in Output Decrease/Increase* Decrease/Increase/No Change* Long-Run Change in Price Level Same as Initial expectation/Higher then initial expectations/ lower then initial expectations* (same options as box on the left) ** Long-Run Change in Output       Decrease/Increase/No change*…

In a certain economy, the Dynamic Aggregate Supply (DAS) line is represented by the function = - π₁ = Ę ₁ = ₁ π + α ( Y₁ − Ÿ) + D and the inflation expectations formation mechanism is adaptive, that is, E₁+1 Absent a supply shock (v₁ = 0), in a figure representing period t inflation rate, π, on the vertical axis, and period t output, Y₁, on the horizontal axis, the period t DAS line will pass through the pair of points, : OA. (-1) B. (α, Y) ○ C. (Y) D. (πt, Yt)

Explain the concept of “Divine Coincidence” and clearly state the cases where it holds and where it does not hold in the New-Keynesian model.

How would the AD/AS model be different if it assumed rational expectations rather than adaptive expectations? Define and give an example of each.

Which of the following answers best describes how policy makers should respond to negative aggregate demand (AD) shocks relative to negative aggregate supply (AS) shocks. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. Policy makers should respond to a negative AD shock with a positive AD shock. They should respond to a negative AS shock by not responding at all. a Policy makers should respond to a negative AD shock with a positive AD shock. They should respond to a negative AS b shock with a positive AD shock. Policy makers should respond to a negative AD shock with a positive AD shock. They should respond to a negative AS shock with a negative AD shock. Policy makers should respond to a negative AD shock with a positive AD shock. There is no best response to a negative AS d. shocks.

Which of the following is true the dynamic AS-AD model? The dynamic aggregate demand curve is downward sloping because the central bank follows the Taylor principle. An increase in the natural level of output increases the long-run inflation rate. To control inflation, the central bank should increase the nominal interest rate by less than one for one in response to an increase in the inflation rate. The monetary policy rule determines the slope of the dynamic aggregate supply curve.

You work at the Central Bank and you are in charge of forecasting the effects of possible future shocks using the ASAD Redux model. Today, your task is to predict what will happen if the economy is subject to two consecutive shocks, namely, At time t = 1, there is a persistent positive shock on aggregate demand due to increased desired expenditures (e.g., a higher propensity to consume). At time t = 2, the Central Bank implements a permanent reduction in money supply. %3D The Central Bank wants you to forecast what will be the effects of a range of monetary contractions of different magnitude. Hence, you run six numerical simulations of the model assuming different sizes of the reduction in money supply. However, the software is faulty and some simulation results are wrong. Your computer produces six scenarios for employment (N) and price level (P), but some scenarios are clearly incorrect and inconsistent with the general predictions of the theoretical model: you need to eliminate the…

b) There is a change in expectations and firms in the economy now expect the price level to be lower in the future. In the context of the AS-AD model, and with the aid of a diagram, explain the short run effects this has on the price level output, and unemployment in the economy.