Consider the extended AD-AS model with the augmented Phillips curve. Full-employment output is y= 300 and the aggregate demand takes the form AD = 20+ 2(M/P). The short-run supply is y= y +2(P- pe) and M = 500. Starting from the long-run equilibrium, the quantity of money is increased to M = 800. The increase is unanticipated. This means that the expected price pe is the price in the long-run equilibrium before the increase in M. What will be the equilibrium price and output in the first period in which the increase in M arises? (Hint: the root finding formula for quadratic equation ax² + bx + c = 0 is -btyb2 - 4ac ) 2a O A. P=5.63, Y=304.12 O B. P=2.60, Y=340.42 O C. P=10, Y=350 O D. P=1.45, Y=503.34

Full employment output is 100. We have AD = 200 -2P where P is the price level. Suppose that a demand shock lowers the AD curve to 180 - 2P. Since the price is fixed, the quantity of produced in the short run immediately after the negative AD shock is (40, 50, 80, 100), but the price in the long run is (40, 50, 80, 100)

Answer the following questions regarding the Keynesian perspective.  From a Keynesian point of view, which is more likely to cause a recession: aggregate   demand or aggregate supply, and why? Why do sticky wages and prices increase the impact of an economic downturn on unemployment and recession? Explain what economists mean by “menu costs”. What tradeoff is shown by a Phillips curve? What is the Keynesian prescription for recession? For inflation? How did the Keynesian perspective address the economic market failure of the Great Depression? Does it make sense that wages would be stickier downwards but not upwards? Why or why not?

Consider an economy with a natural unemployment rate, u, of 9%. The x = x - 2(u - ū) Assume that Okun's Law holds so that a 1 percentage point increase in the unemployment rate maintained for one year réduces GDP by 2% of full employment output. Note: Okun's Law can be expressed as: Y-Y expectations-augmented Phillips curve is: = -2(u - u) a. Consider a two-year disinflation. In the first year actual inflation, , is 13% and expected inflation, xº, is 17%. What is the first year unemployment rate? % (Enter your response as a percentage rounded to one decimal place)

Based 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 8 of 20) Now consider that in in the following year (2017), the government decided to implement a…

intersects AS₁. If there is an anticipated decrease in aggregate demand to AD2. then, according to rational expectations theory, the path for adjustment runs from point Multiple Choice O о O A to B to C. A directly to D. A directly to C. A to D to C.

The mainstream view of macroeconomic instability emphasizes sticky prices. To answer the following questions, modify the aggregate supply curve in the extended AD-AS model introduced in Chapter 35. First, imagine that both input and output prices are fifixed. What does the aggregate supply curve look like? If AD decreases in this situation, what will happen to equilibrium output and the price level? Next, imagine that input prices are fifixed, but output prices are flexible. What does the aggregate supply curve look like? In this case, if AD decreases, what will happen to equilibrium output and the price level? Finally, if both input and output prices are fully flflexible, what does the aggregate supply curve look like? In this case, if AD decreases, what will happen to equilibrium output and the price level? (Hint: If you are having trouble drawing these three aggregate supply curves, review the immediate-short-run aggregate supply curve and the short-run aggregate supply curve…

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

According to the pure expectations theory, the short term rates will exceed long term rates whenever market participants expect short term rates to increase in the future. True/False?

A policy-maker minimises a loss function of the form: V = [u – (un – k)]² + a(n – n°)² subject to current given conditions for the economy stated as u = un – b(n – n°) + E. Price and wage setters are endowed with rational expectations. Derive the time consistent rate of inflation.