in the Lucas Imperfect Information model, do aggregate demand shocks have real affects? Explain. What is the implication of this result for stabilisation policy?
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in the Lucas Imperfect Information model, do aggregate
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- 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…Consider a standard AD-AS model. If the central bank responds relatively aggressively to inflation being below target, temporary supply shocks have relatively little effect on output. True/False. Remember to include your explanation.a) In the AS/AD macro model, starting at potential GDP explain what happens in the short run when there is an exogenous increase in government consumption spending.b) What happens in the long run?c) What would be different in the short run and the long run if the initial shock had been an exogenous increase in energy prices?d) How would the answer to a) and b) have been different if the economy had started with excess capacity (and a horizontal short-run aggregate supply curve)?e) What is meant by “the GDP gap”?
- Consider the AD-AS model. Assume the aggregate demand curve is given by Y= 8-0.5n, that the long run aggregate supply curve is given by Yp = 7, that the short run aggregate supply curve is given by n =n_expect + 0.3(Y - Yp), and that the monetary rule is given by r= 1+0.3n A) What is the economic interpretation behind the aggregate demand curve? Why is it negatively sloped? If you consider point A=(n,Y}=(3, 6.5) and point B={n,Y)=(5, 5.5), is monetary policy more expansionary in point A, in point B, or neither? Are you referring to the exogenous or to the endogenous stance of monetary policy? B) Suppose the economy is in equilibrium at the potential level of output, with inflation expectations equal to actual inflation, which equals 2%. A financial crisis hits the economy. Use the model to interpret what happens in the short run and in the long run if the central bank does not intervene exogenously with an expansionary monetary policy. C) According to the AD-AS model, what is more…Consider the AD-AS model discussed during the lectures. Assume that the aggregate demand curve is given by Y=8-0.5 π, that the long run aggregate supply curve is given by Yp=7, that the short run aggregate supply curve is given by π = π_expect + 0.3(Y-Yp), and that the monetary rule is given byr=1+0.3 π. Suppose the economy is suffering a decrease in the potential level of output, due to some ill-designed new regulation. According to the AD- AS model, what is more suitable to offset the subsequent decline in output, an expansionary monetary policy or an expansionary fiscal policy?Q: To what extent has the time-inconsistency problem influenced the formation and practical operation of macroeconomic policy?
- Consider the AS-AD and three-equations models of a closed economy. Write down the expressions for the AS and AD curves and interpret the expressions: what is the intuition behind the two curves? What must be true of the model parameters and variables in the long-run equilibrium, i.e. in the steady state? Analyse the effects of an oil supply shock that causes a temporary increase in inflation, using the three-equation model. Assume that the shock lasts for one-period and then assumes the value 2%. Describe the mechanisms that bring the economy back to long-run equilibrium. What happens to aggregate demand? Consider an economy that starts out in steady state when the central bank decides to make the inflation target more ambitious. Analyse the effects of a decrease in the inflation target from ? to . Explain the mechanisms behind the adjustment to the new steady state.Consider the original AD/AS model in steady state. If the central bank fights against inflation more aggressively, explain how would inflation and short-run output respond differently to aggregate demand shock? (Hint: m-bar)Consider the AD-AS model discussed during the lectures. Assume that the aggregate demand curve is given by Y = 8 - 0.5π, that the long run aggregate supply curve is given by Yp = 7, that the short run aggregate supply curve is given by π = π_expect + 0.3(Y - Yp), and that the monetary rule is given by r = 1 + 0.3π. b) Suppose the economy is in equilibrium at the potential level of output, with inflation expectations equal to actual inflation, which equals 2%. A financial crisis hits the economy. Use the model to interpret what happens in the short run and in the long run if the central bank does not intervene exogenously with an expansionary monetary policy.
- Show using a graph how the following shocks would affect equilibrium output. (Which parameters in the Keynesian model change? How does that shift the expenditure schedule? What happens to output as a result?) (a) The housing market collapses (b) Interest rates rise (c) The US dollar depreciates (gets weaker) relative to the Euro (d) Consumer confidence rises in Canada (Hint: use one picture to show what happens to Canada, then another to show how this affects the US economy)Concept of Hysteresis suggests that the economic shocks affect the economy only for a short time period. True or false, justify your response in either case:What is the economic justifcation for the sticky infation assumption? Whatrole does this assumption play in the short-run model?