ENGR.ECONOMIC ANALYSIS
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ISBN: 9780190931919
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Consider the ASAD model of a closed economy with zero ongoing inflation in the medium run. The aggregate demand curve is determined by the IS-LM model. The
a) Assuming that interventions are successful, what happens employment in the short and in the medium run?
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- 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?arrow_forwardsubquestions a and b. * for a) - need to find the IS equation, also the LM equation and the equilibrium.arrow_forwardBased on research conducted by the Department of Economic Analysis, the government and policy advisors of an economy believe that the full employment GDP is $7500 billion, and Pe, the overall expected price level is 118. In addition, the researchers estimate that the short run aggregate supply equation is Y = Ypot + 80 (P- Pe), where Ypot is the potential level of output. In 2016, the population was 400 million, and the structure of the economy was described by the following equations for household consumption behavior and taxes received: C = 100+ 0.8DI, and T = 0.25Y where all monetary values are in billions of dollars. Government spending was fixed at $1700 billion, and firm's investment behavior was fixed at $800 billion. Trading is allowed in this economy and in 2016, trading occurred such that the trade account was balanced. That is, net exports (X-IM) was equal to zero. Question 17 of 20) Now consider that in in the following year (2017), the government decided to implement a…arrow_forward
- Discuss one practical issue in the Ghanaian economy which validates any one of the following Aggregate Supply models The Sticky-wage Model The Imperfect-information Model The Sticky-price Model.arrow_forwardAssume an economy that starts with Y = Y₂. Illustrate graphically and explain the impact of a fall in energy prices in the IS-LM-PC model with anchored expectations. Illustrate graphically, explain, and discuss the impact of the fall in energy prices depending on whether the central bank, firms, or workers have the power to adjust the economy to keep inflation at its target rate after the fall in energy prices. ་པཕབ་པ་arrow_forwardConsider the following 3-equation model: Y 108-2rCB +2(G-T) (1) rCB =4+1.5(\pi-\pi)+0.5(Y-Y) (2) \pi \pie+0.5(YY) (3) wherey isoutput, \pi isinflation, \pi e =\pi = 2, andY* = 100. Expected future inflation is \pi e, and Y-Y⚫ is the output gap. The variable rCB is the interest rate set by the central bank. We may interpret \pi as the central bank's inflation target. Government ex- penditure, G, and net taxes, T, are given and set by the government. (a) Which equation is the IS curve, and which is the New Keynesian Phillips curve? Provide a brief economic explanation for the relationship between \pi and \pi e in Equation (3). (b) Find inflation, output and interest rates when G = T = 5. (c) Now suppose G = 8.5 and T = 5. How are inflation, output and interest rates affected? Is the impact of the fiscal expansion on output magnified or reduced by monetary policy? Explain.arrow_forward
- 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.arrow_forwardConsider the ASAD model of a closed economy with zero ongoing inflation in the medium run. The aggregate demand curve is determined by the IS-LM model. The aggregate supply curve is derived from the imperfect competition model of the labour market (the WS-PS model where firms have perfect foresight, monopoly power, and use a linear technology with constant returns to labour; workers expect zero inflation in every period, and their wage requests are an increasing function of wage-push factors like unions' bargaining power). The economy is initially in the potential equilibrium. Assume a permanent increase in the bargaining power of unions. Fiscal and monetary authorities perfectly forecast this shock and decide to neutralize immediately its consequences for the price level by enacting a “policy of price stability” that successfully eliminates all fluctuations in the general price level in every period. Therefore, the economy is subject to two simultaneous shocks – the increase in…arrow_forwardIn 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)arrow_forward
- 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.arrow_forwarda and b pleasearrow_forwardWhich 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.arrow_forward
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