ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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- 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…arrow_forwardIf most people have rational expectations, how long will recessions last? Explain using your beliefs and experiences coupledarrow_forwardDraw and properly label an AD-AS model to show Keynesian, intermediate, andneoclassical zones (6%). Then, briefly explain the levels of unemployment, inflationand real GDP in each zone, and also confirm whether all three goals of a macroeconomy are being achieved in each zone. (14%)arrow_forward
- Explain the role of expectations in the macroeconomy.arrow_forwardthe August unemployment figures for Australia were surprisingly better than predicted (did not continue to increase) given the collapse that occurred in the economy due to COVID closures. (a) Use the static AD-AS model to explain the short run impact of the COVID closures on the economy and discuss the implications this has for unemployment. b) Comment on the limitations of the static AD-AS model in analysing the situation under COVID.arrow_forwardEgypt 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.arrow_forward
- Mexico is experiencing a Recession due to decrease demand. Draw a correcly labeled AS/AD model representing where the economy is relative to the Natural Rate of Unemployment.arrow_forwardWhich of the following are business cycle theories that regard fluctuations in aggregate demand as the factor that is creating business cycles? I. Keynesian cycle theory II. real business cycle theory III. monetarist cycle theoryarrow_forwardHow would the AD/AS model be different if it assumed rational expectations rather than adaptive expectations? Define and give an example of each.arrow_forward
- Consider a one-sided search model of unemployment we developed in class. In class discussion we never mentioned how unemployment insurance benefit, b, is financed. For this question, you are going to incorporate it to the model. Let's assume that in order to finance the unemployment insurance benefit, b, the government imposes lump-sum tax, T, on each employed worker. Assuming that the economy is in a long-run steady-state equilibrium, the total amount that needs to be paid out to unemployed workers is bU, where as usual, U repre- sents the fraction of unemployed. The total amount of tax collected (which we can interpret as an unemployment insurance premium) from employed workers is (1U)T. The government runs balanced budget, hence, bU = (1 – U)T. In this new setting, please show the effect of an increase in unemployment in- surance benefits, b, on reservation wage, w*, and on the long-run unemployment rate, U. Using graphs clearly demonstrate how the behavior of this model is…arrow_forwardSort the following shocks into aggregate supply or aggregate demand shocks. Remember that "shocks” include both good and bad events. No need to motivate your answer. Fall in the price of oil A rise in consumer optimism A hurricane that destroys factories Good weather that creates a bumper crop A rise in sales taxes Foreigners buy fewer goods Fear New inventions occur at a faster pace A faster money growth ratearrow_forwardConsider the Ramsey Model of the macroeconomy. Explain using a phase diagram how an economy starting from any point in phase space reaches the unique steady state solution. Now suppose once the steady state is reached that there is an unexpected permanent fall in government spending. Explain, using a phase diagram, how the c = 0 and k = 0 curves are affected and how the economy moves to a new steady state. How are interest rates affected during the transition to the new steady state? Explain your answer.arrow_forward
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