n the basic New Keynesian model, suppose that there is an increase in government spending. • First, suppose that the central bank does nothing (accommodates the shock). Illustrate on the graphs and explain what will be the effects on inflation and output? • Second, suppose that economy initially has inflation equal to the central bank’s inflation target and an output gap of zero. What action do you expect the central bank would undertake? Illustrate you answer on the graph and explain.   PLEASE SHOW ALL HAND WRITTEN STEPS AND WORK!

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Use the following figure to answer the next question. Price Level AS AD₂ AD₁ Y₁ Y₂ Real GDP Suppose the economy is currently at full employment with aggregate demand curve AD2. A further increase in consumption and investment spending will cause Multiple Choice Odemand-pull Inflation, and the new equilibrium output will be less than Y2. O cost-push inflation, and the new equilibrium output will be less than Y2. 0 O cost-push inflation, and the new equilibrium output will be more than Y2. demand-pull inflation, and the new equilibrium output will be more than Y2. MacBook Pro 66 27 & + ✓ 8 9 R T Y U ull 0 0 LL F G H J K

The Keynesian Model of the macroeconomy argues that prices are sticky due to labor contracts and unions. a. The existence of sticky prices causes the to be horizontal. b. Suppose that the aggregate demand changes due to an increase in the amount of money in circulation. Using the line drawing tool, draw the new aggregate demand curve. Label it AD₁. Carefully follow the instructions above, and only draw the required objects. earch Ef

Consider the classical AS-AD model with misperceptions. Assume that the economy is initially at its general equilibrium. Now, suppose the central bank considers an increase in the nominal money supply that is not anticipated by households or firms. b. How does the misperception theory work? c. Which of the three markets discussed in class is first affected (labor, goods, or asset market)? Explain and show graphically how this market is affected by an unanticipated increase in the nominal money supply.

1. In macroeconomic, How expectations can play a role in shaping both consumption behavior and investment behavior.

Refer to the figure below. Which one of the following statements is FALSE (FIGURE 6)? Figure 6 Inflation rate (7) Unemployment E₂ AD Y* AS Output (Y)

Consider the Keynesian sticky wage model. Assume that the economy is operating close to, but not at, its zero lower bound (ZLB). Discuss the following: 1. Could a negative shock to the IS curve make the ZLB bind? Explain and illustrate graph- ically. 2. Could a shock to current productivity z make the ZLB bind? What would need to be the sign of this shock to make the ZLB bind? 3. In the data, in most episodes where the ZLB binds (the US in the wake of the Great Recession, Japan during the 1990s, and the US during the Great Depression), output is low. Given this, would a supply shock as the reason for a binding ZLB make empirical sense? 4. Intuitively, explain why changes in government spending have a bigger effect on output at the ZLB than away from it.

Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not?

of The economy of Langoria is currently in a state of long-run equilibrium in which the economy is producing at its Natural Real GDP. The level of Real GDP is currently 3 trillion dollars, and the price level is 130. 100 PRICE LEVEL 170 160 150 140 130 120 110 100 2 Changes in a Self-Regulating Economy AD AD₂ BRAS 1 2 3 LRAS 23