Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 13, Problem 11E
(a)
To determine
Derive the IS –MP curve.
(b)
To determine
Explain the effect of shock in the standard IS – MP
(c)
To determine
Explain the IS –MPR crowding out.
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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.
c) According to the AD-AS model, what is more challenging for a central bank: to use active exogenous monetary policy to offset a financial shock, or to use active exogenous monetary policy to offset an exogenous increase in prices due to an oil price shock? Use the model to discuss each case separately. Can the central bank avoid a drop in output and a variation in the price level?
c) According to the AD-AS model, what is more challenging for a central bank: to use active exogenous monetary policy to offset a financial shock, or to use active exogenous monetary policy to offset an exogenous increase in prices due to an oil price shock? Use the model to discuss each case separately. Can the central bank avoid a drop in output and a variation in the price level?
in the Lucas Imperfect Information model, do aggregate demand shocks have real affects? Explain. What is the implication of this result for stabilisation policy?
Chapter 13 Solutions
Macroeconomics (Fourth Edition)
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- Suppose that the following equations represent an entire economy. What size output shock will send the economy into a liquidity trap? t = y0.5 (r - 3%) r = 2% + (πt - 2%) + 2.9t πt = 2% + tarrow_forwardConsider 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?arrow_forwardConsider 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. a) What is the economic interpretation behind the aggregate demand curve? Why is it negatively sloped? If you consider point A=(π,Y)=(3, 6.5) and point B=(π,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?arrow_forward
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