Use a standard dynamic AS-AD model to explain how the macroeconomy adjusts following a favourable supply shock (vt < 0) for one period which reverts to zero for all subsequent periods. Assume that the economy starts from its long-run equilibrium. As a reminder, the DAD and DAS curves, respectively, are provided below: Y =Y - αθη 1+aly Tt = t_1+ ¢(Y - Y)+v where Y is output, πt is inflation, 0 and Oy capture the responsiveness of the central bank to inflation and output, a is the sensitivity of output to the real interest rate and is the sensitivity of inflation to the output gap. Y is the natural output level, and π* is the central bank's inflation target. [Hint: It will be helpful to work this question out using diagrams, but you are not required to provide them as part of your solutions.] -(πt - π* π*) + 1+aly Et A. (2 points) Explain the impact effect of this shock on output, inflation, and the real interest rate. B. (3 points) Explain the dynamic response of output, inflation, and interest rates in subsequent periods. Does the economy converge back to the same long-run equilibrium? C. (2 points) Explain how the central bank responds to inflation and the importance of the monetary authority following the Taylor principle. D. (3 points) How would your answer to (B) change if the shock lasted for several periods (instead of one period) before reverting to zero?

Notice the major differences between our Keynesian Cross (in your chapter 9 appendix) and the Macro Equilibrium (AS and AD) diagram? Which model has more to offer in which situations?

Egypt authorities faced significant health and economic policy challenges during the COVID19 Pandemic, shutting down certain industries to protect public health. This shutdown resulted in almost 1 million jobs lost in April and May 2020, and a dramatic fall in consumers’ and firms’ confidence to spend and invest. Describe the effect that a fall in confidence had upon output in the Egypt economy using a Keynesian model of the macroeconomy. Ensure that your analysis includes the following:(i) the components of expenditure that are affected and why;(ii) the adjustment process associated with moving from an initial equilibrium (before the onset of the pandemic) to a new equilibrium (after the significant job losses), i.e. the mechanism that leads to a change in output (including a relevant diagram);(iii) an explanation of what the multiplier is and its role in explaining the fall in output; and(iv) a discussion of the policy actions that can restore aggregate demand to its initial level.

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.