
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Transcribed Image Text:Consider an AD-AS model with AD curve Y - Y* = −αy(n − ñ*) + € and AS curve
π = π² + ¢ß(Y – Y*) + €s with parameter values a = 2, y = 1, p = 1 and ß = 2 and with
inflation target * = : 0.01 and potential output normalised to Y* :
= 1.
e
T
Starting from a long-run equilibrium with ² = *, suppose there is a temporary supply shock
€s = 0.05. Which of the following is FALSE?
In the short run, inflation is 1% above target
In the short run, output is 2% below potential
In the short run, the real interest rate rises
O In the short run, the real interest rate falls
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