Suppose the MP curve is given by r = 1+0.5π, and the IS curve is given by Y = 18 − 3r. a. Derive an expression for the AD curve. b. Suppose that λ doubles. Derive an expression for the new AD curve. c.What does your answer to part (b) imply about the relationship between a central bank’s distaste for inflation and the slope of the AD curve?
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Suppose the MP curve is given by r = 1+0.5π, and the IS curve is given by Y = 18 − 3r.
a. Derive an expression for the AD curve.
b. Suppose that λ doubles. Derive an expression for the new AD curve.
c.What does your answer to part (b) imply about the relationship between a central bank’s distaste for inflation and the slope of the AD curve?
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- Suppose the IS curve is given by Y = 13 – 100*r, and the AD curve is given by Y = 11.5 – 75pi. a. Derive an expression for the MP curve. b. Suppose that A increases to A=2.Derive an expression for the new AD curve. c. If A = 0, What does that imply about the relationship between a central bank's distaste for inflation? What is the slope and shape of the MP curve? %3D - %3D d. Explain the reasons why the MP curve might shift.Suppose an economy for which the Dynamic Aggregate Supply in period t is given by the equation: + 12 (Y₁₂ - Y). π₁ = πⓇ where is the inflation target set by the monetary authority and Y the potential or long-run equilibrium of output. Which of the panels below contains the correct graphical representation of this DAS? (go to full screen to see all the panels at once) A Tit 1 TT + # Ý DAS-1 B TL πt 1 Y DAS-1 Y₁During a 2008 interview, then German Finance Minister Peer Steinbrueck said, "We have to watch out that in Europe and beyond, nothing like a combination of downward economic [growth] and high inflation rates emerges-something that experts call stagflation." Such a situation can be depicted by the movement of the short-run aggregate supply curve from its original position, SRAS,, to its new position, SRAS2, with the new equilibrium point E2 in the accompanying figure. In this question, we try to understand why stagflation is particularly hard to fix using fiscal policy.
- A Central Bank is said to have a more hawkish stance when it reacts more aggressively against deviations of inflation from target. Recall that the AD curve is given by: Ýį = ā – bm(T; – ñ), and the AS curve is given by Tt = Tt-1 + ū¥Ýt +ō Knowing this, saying that the Central Bank became more hawkish is equivalent to say: Inflation, AS AD Output, Ỹ O That ā decreased, thus moving down the AD curve. O That b decreased, thus making the AD curve steeper. That ū increased, thus making the AS curve steeper. O That ñ decreased, thus flattening the AD curve. O That the equilibrium inflation moved to below ĩñ. That b decreased, thus making the AD curve flatter. O That ā increased, thus moving up the AD curve. O That ñ increased, thus flattening the AD curve."According to Keynesian theory, an increase in the money supply can cause interest rates to fall without affecting nominal income. In this case, how does the velocity of money change? Explain and demonstrate using the money market graph."Consider the Money Demand Function. a) briefly describe the effect of an increase in Expected inflation on money demand.
- Based on understanding of the AS-AD model, graphically illustrate and discuss what effects an increase in the money supply will have on the economy: Analyse the effects of the central bank policy on GDP and price level in the short run. Justify your answer. Analyse the effects of the central bank policy on GDP and price level in the long run. Justify your answer. In your graph, clearly illustrate the short-run and long-run equilibria. Discuss the effectiveness of the central bank policy in the short and in the long run? Justify your answer.Suppose a central bank targets an inflation rate of 3%. She projects a long-term economic growth rate of 4%. Suppose the new Chairman of the central bank will assume his duty next year. He is widely expected to be a “monetary hawk” – he favors a “tighter” growth in money supply. Other things being constant, how would this affect the expected inflation rate, nominal interest rate and the current general price level? Using relevant Classical Theories, briefly explain your answers.E. 2. 4)During a 2008 interview, then German Finance Minister Peer Steinbrueck said, "We have to watch out that in Europe and beyond, nothing like a combination of downward economic [growth] and high inflation rates emerges-something that experts call stagflation." Such a situation can be depicted by the movement of the short-run aggregate supply curve from its original position, SRAS,, to its new position, SRAS2, with the new equilibrium point E2 in the accompanying figure. In this question, we try to understand why stagflation is particularly hard to fix using fiscal policy. Aggregate price level LRAS SRAS2 SRAS, AD1 Real GDP Recessionary gap a. What would be the appropriate fiscal policy response to this situation if the primary concern of the govern- ment was to maintain economic growth? Illustrate the effect of the policy on the equilibrium point and the aggregate price level using the diagram. b. What would be the appropriate fiscal policy response to this situation if the…
- Consider the following numerical example of the IS-LM model: C = 200 + 0.25YD I = 150 + 0.25Y - 1000i G = 250 T = 200 i = .05 (i has a bar over it) a. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.) b. The central bank sets an interest rate of 5%. How is that decision represented in the equations? c. What is the level of real money supply when the interest rate is 5%? Use the expression:(M>P) = 2Y - 8000i d. Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G. e. Now suppose that the central bank cuts the interest rate to 3%. How does this change the LM curve? Solve for Y, I, and C, and describe in words the effects of an expansion-ary monetary policy. What is the new equilibrium value of M/P supply? f. Return to the initial situation in which the interest rate set by the central bank is 5%. Now suppose that government spending increases to G = 400. Summarize the…If the LRAS curve shifts, does the AS curve also have to shift? If the AS curve shifts, does the LRAS curve also have to shift? (Hint: Consider the factors that shift each curve and determine whether these factors also shift the other curve.) The Federal Reserve can use expansionary/contractionary policy to shift the AD curve. Use the AD–AS framework to show how monetary policy should be used to return output to potential GDP when: (i) the aggregate demand curve intersects the short-run aggregate supply curve to the left of potential GDP; and (ii) the aggregate demand curve intersects the short-run aggregate supply curve to the right of potential GDP. Given that the economy can correct itself and return to potential GDP, why would the Fed pursue contractionary monetary policy following a negative aggregate supply (inflation) shock? How could the Fed pursuing a contractionary monetary policy be preferable to the economy correcting itself? Is it possible that a contractionary monetary…In the last year there has been a significant increase in the inflation rate in Canada. Use the Keynesian transmission mechanism to explain fully the impact of this increase in inflation on each of the following: The money supply The demand for money The interest rate Aggregate Demand GDP. Remember to use subject