Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 13, Problem 16E
(a)
To determine
Parameter and inflation rate.
(b)
To determine
Calculate the inflation rate short-run output.
(c)
To determine
Relationship between the inflation rate and short-run output.
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Students have asked these similar questions
Consider the short-term model characterized by the following AS and AD curves:
Ý, = à – bm(x, – ñ) (AD]
and
A; = x; + vỶ, + õ, (AS).
The economy is in steady state at time t = -1 (that is, a-1 = ñ, ō-1 = 0, and ā = 0). It is hit by a
one-time inflation shock öy = .025 at time i = 0.
For now, expectations are adaptive: 7 = ,-1.
You'll use the answer to this question in several follow-up questions. To keep track of your results,
you should use a spreadsheet application. If you don't already have one, you can use this
hyperlinked template e (it's a Google Sheet).
Calculate zo assuming b = 0.5, m = 2, ñ = 0.03, and ū = 1.
Enter your answer as a percentage and round to the nearest hundredth.
Consider a standard AD-AS model.
The economy is affected by the following sequence of events. In period 1 there is a shock to the economy that is temporary. In period 2, the shock ends. But having observed an inflation outcome different to the inflation target, inflation expectations change from the inflation target to a value exactly equal to the observed inflation in period 1 (that is, expectations are not `anchored’).
A temporary positive demand shock would lead to output above potential in period 1, but below potential in period 2.
Answer true or false. Please briefly explain your answer.
Consider a standard AD-AS model.
The economy is affected by the following sequence of events. In period 1 there is a shock to the economy that is temporary. In period 2, the shock ends. But having observed an inflation outcome different to the inflation target, inflation expectations change from the inflation target to a value exactly equal to the observed inflation in period 1 (that is, expectations are not `anchored’).
A temporary Negative demand shock would lead to output below potential in period 1, but above potential in period 2.
Answer true or false. Please briefly explain your answer.
Chapter 13 Solutions
Macroeconomics (Fourth Edition)
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Similar questions
- Suppose the Phillips curve is and the Aggregate Demand curve is Tt = Tt1+3ytot Yt = at 5(πt - 0.02) where at = Ot = 0 in the steady state. (a) Calculate the steady state values of output and inflation in this economy. (b) Calculate the short- and long-run responses of the economy to the following shocks (use a table to report your answers, as well as show them graphically on the AD-AS graph, as well as plot inflation and output against time): (1) A one-time decrease in ot to -0.05. (2) A one-time increase in at to 0.05 (at returns to 0 thereafter). (3) A permanent decrease in the Fed's inflation target from 0.02 to 0.arrow_forwardConsider the AS-AD and three-equations models of a closed economy. Write down the expressions for the AS and AD curves and interpret the expressions: what is the intuition behind the two curves? What must be true of the model parameters and variables in the long-run equilibrium, i.e. in the steady state? Analyse the effects of an oil supply shock that causes a temporary increase in inflation, using the three-equation model. Assume that the shock lasts for one-period and then assumes the value 2%. Describe the mechanisms that bring the economy back to long-run equilibrium. What happens to aggregate demand? Consider an economy that starts out in steady state when the central bank decides to make the inflation target more ambitious. Analyse the effects of a decrease in the inflation target from ? to . Explain the mechanisms behind the adjustment to the new steady state.arrow_forwardConsider an economy producing at Ý, = 0 and ū = 1/4. The inflation rate at t = 0 is To = 3% . Now, suppose the economy is hit by an inflation shock õ1 = ö2 = 3%. The shock is temporary and ōg = 0 for t > 2. For the duration of the inflation shock, the economy is in a recession with Ý1 = Ý2 = -1%, which ends with Ý 3 = 0. Based on this information, you know that the inflation rate 73 i , percent.arrow_forward
- Consider the AS/AD model. The AS curve is: Y, = a – bm(r, - 7) and the AD curve is: Thy = T-1 + DỸ, +ō. where r is inflation and Y is short-run output. The subscript t indexes time. ī = 0.01,0 = 0.02, ā = 0.04, b = 0.05, and m = 0.04 are fixed strictly positive parameters. Assume the inflation target is 0.02 (or 2%). Calculate Y at the steady state. (If you answer is 3%, do not put the percentage sign enter 3 or 0.03).arrow_forwardThank you so much for your time and effort! Please note that this is a multi part quesition! Figure 2: Keynes’s AD-AS Model (Image normally goes here) Part 1:Changes in which factors could cause aggregate demand to shift from AD to AD1? What could happen to the unemployment rate? What could happen to the inflation rate? Part 2: The Keynesian AD-AS model describes what happens with price levels when aggregate demand increases. Could you find any evidence from the last ten-fifteen years that might support AD-AS model descriptions of demand-pull inflation, cost-push inflation, and recession? For example, you could find data on the GDP’s of any two countries from 2000 to 2017 to support your findings. Please note the followong for the next 3 parts of this. In macroeconomics, the immediate short run is known as a length of time when both input prices and output prices are fixed. In the short-run, input prices are fixed but output prices are variable. In the long run, input prices and…arrow_forwardIn Figure 2 above, what are the factors that may cause the aggregate demand to shift from AD to AD1? What is the difference between demand-pull inflation, cost-push inflation and recession?arrow_forward
- Consider the AS/AD model. The AS curve is: Ỹ, = a – bm(r, – T) and the AD curve is: T; = T;-1 + UY, +ō. t where t is inflation and Y is short-run output. The subscript t indexes time. ū = 0.01, ō = 0.02, ā = 0.04, b = 0.05, and m = 0.04 are fixed strictly positive parameters. Assume the inflation target T is 0.02 (or 2%). Calculate T at the steady state. (If you answer is 3%, do not put the percentage sign enter 3 or 0.03).arrow_forwardThe mainstream view of macroeconomic instability emphasizes sticky prices. To answer the following questions, modify the aggregate supply curve in the extended AD-AS model introduced in Chapter 35. First, imagine that both input and output prices are fifixed. What does the aggregate supply curve look like? If AD decreases in this situation, what will happen to equilibrium output and the price level? Next, imagine that input prices are fifixed, but output prices are flexible. What does the aggregate supply curve look like? In this case, if AD decreases, what will happen to equilibrium output and the price level? Finally, if both input and output prices are fully flflexible, what does the aggregate supply curve look like? In this case, if AD decreases, what will happen to equilibrium output and the price level? (Hint: If you are having trouble drawing these three aggregate supply curves, review the immediate-short-run aggregate supply curve and the short-run aggregate supply curve…arrow_forwardConsider a standard AD-AS model. If the central bank responds relatively aggressively to inflation being below target, temporary supply shocks have relatively little effect on output. True/False. Remember to include your explanation.arrow_forward
- Y=F(K,L) K=R L=T Y=C+I+G C = Co + C1( Y – T) – C2r I = I0 - I1r G=G T=T It is known that in addition to a drop in consumer confidence, investor confidence also fell. Explain mathematically, graphically, and intuitively what effects these two shocks will have (simultaneously) in the long run on consumption, savings, investment, interest rates, fiscal deficit, and output.arrow_forwardTwo potential causes of inflation above target in the AD-AS model: Demand-pull inflation: This occurs when aggregate demand (AD) increases more than the long-run aggregate supply (LRAS). In the AD-AS diagram, this would be represented by a rightward shift of the AD curve. The result is a higher price level and real GDP beyond the long-run macroeconomic equilibrium level. Cost-push inflation: This occurs when the short-run aggregate supply (SRAS) curve shifts to the left due to increased production costs, such as rising wages or input prices. In the AD-AS diagram, this would be represented by a leftward shift of the SRAS curve. The result is a higher price level and a reduction in real GDP. how do i graph this information in an ad-as diagramarrow_forwardConsider an economy producing at Yo = 0 and ū = 1/4. The inflation rate at t = 0 is TO = 3%. Now, suppose the economy is hit by an inflation shock ō1 = ō2 = 3%. The shock is temporary and ōt = 0 for t > 2. For the duration of the inflation shock, the economy is in a recession with Y = Ý2 = -1%, which ends with Y3 = 0. Based on this information, you know that the inflation rate T3 is percent. 8.5 8.5 (with margin: 0)arrow_forward
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