Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 12, Problem 3AP
a)
To determine
The evolution of AD curve, SRAS curve, output, the price level, and the expected price level over time in an economy. And the values of unanticipated inflation and cyclical
b)
To determine
The actual and unanticipated inflation rates during 2019 and find the cyclical unemployment during 2016. And determine how this result is related to the expectations-augmented Phillips curve.
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Students have asked these similar questions
A Keynesian economy is described by the following equations.
Consumption Cd = 250 + 0.5(Y - T) - 250r
Investment Id = 250 - 250r
Government purchases G = 300
Government taxes T = 300
Real money demand L = 0.5Y - 500r + πe
Money supply M = 3000
Full-employment output Y = 1250
Expected inflation πe = 0
(HINT a: The expected rate of inflation is assumed to equal zero so that money demand depends directly on the real interest rate, which equals the nominal interest rate. Domestic Savings, Sd =Y - C - G. In equilibrium set domestic savings equal to domestic investment, so Sd = Id)
Calculate the values of the real interest rate (r), consumption (Cd), and investment (Id) for the economy in general equilibrium.
A friend of yours (who has not taken macroeconomics) has just read that Keynesian theory represented a direct attack on Classical theory. They don't understand either theory and knows you (having just taken macroeconomics) are well-versed in both. They ask you to explain the basic differences between how Keynes and the Classics understood the business cycle and their respective policy prescriptions. Your answer should probably include: a) a basic explanation of what full-employment GDP
means and how it relates to the stability condition S=| (or, equivalently, leakages = injections); b) an explanation of why the Classicals believed that any movement away
from full-employment GDP would be quickly fixed/reversed; c) an explanation of why Keynes thought the Classicals* "auto-correcting" story was problematic, i.e., a detailed explanation of Keynes' multiplier concept (how did Keynes believe a recession would unfold (step-by-step) and why did he believe it could persist); d) an explanation…
Consider the extended AD-AS model with the augmented Phillips curve. Full-employment output is y = 300 and the aggregate demand takes the form AD = 20+
2(M/P). The short-run supply is y=ỹ+2(P- pe) and M = 500. Starting from the long-run equilibrium, the quantity of money is increased to M = 800. The
increase is unanticipated. This means that the expected price pe is the price in the long-run equilibrium before the increase in M. What will be the equilibrium
price and output in the first period in which the increase in M arises? (Hint: the root finding formula for quadratic equation ax2+ bx + c= o is
-b+ /b2 – 4ac
2a
O A. P=5.63, Y=304.12
O B. P=2.60, Y=340.42
O C. P=10, Y=350
O D. P=1.45, Y=503.34
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