Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Chapter 13, Problem 3E
To determine
Explain the one-time negative shock to the inflation rate.
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A negative oil price shock: It is common to blame some of the poor macro- economic performance of the 1970s on the rise in oil prices. In the middle of the 1980s, however, oil prices declined sharply. Using the AS/AD framework, explain the macroeconomic consequences of a one-time negative shock to the infation rate, as might occur because of a sharp decline in oil prices.
Two 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 diagram
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.
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Macroeconomics (Fourth Edition)
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- 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.arrow_forwardConsider 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_forwardConsider the original AD/AS model in steady state. If the central bank fights against inflation more aggressively, explain how would inflation and short-run output respond differently to aggregate demand shock? (Hint: m-bar)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_forwardHow is the AS-AD model of short-run and long-run effects on the price level and inflation when there is a continuing increase in the price of oil if: (a) The Fed accommodates this by increasing the money supply (b) the Fed does not accommodate thisarrow_forwardQuestion 25 Consider a standard AD-AS model. Suppose that the central bank lost credibility in the sense that people no longer believe its inflation target (that is, inflation expectations are not `anchored'). In this case, a permanently higher inflation target leads to a short-run increase in output but no long-run increase in output. Answer True or False. Remember to include your explanation.arrow_forward
- Determine the impact of the each of following types of shocks on output and inflation in the short-run and long-run. (Use AS-AD-LRAS curves to illustrate your reasoning). A decline in consumer confidence. An increase in inflation expectations. An increase in export demand.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_forwardDescribe how changes in expected inflation impact an economy in the wake of a temporary negative supply shock.arrow_forward
- Consider the ASIAD model. The AS curve is: Y, = a - bm(n, - 7) and the AD curve is: T, = T;-1 + TỸ, +ō. where a is inflation and Y is short-run output. The subscript t indexes time. T = 0.01, 0 = 0.02, ā = 0.04, b = 0.05, and m = 0.04 are fixed strictly positive parameters. Assume the inflation target n is 0.02 (or 2%). Imagine the Bank of England decides to increase its inflation target to 0.04 (or 4%) What happens to short-run output Ỹ in the period immediately after the shock? a. increases O b. decreases Oc. stays the samearrow_forwardWhich of the following is true in the dynamic AS-AD model? Group of answer choices The dynamic aggregate demand curve is downward sloping because the central bank follows the Taylor principle. An increase in the natural level of output increases the long-run inflation rate. To control inflation, the central bank should increase the nominal interest rate by less than one for one in response to an increase in the inflation rate. The monetary policy rule determines the slope of the dynamic aggregate supply curve.arrow_forwardCost-push inflation is depicted as a rightward shift of the aggregate demand curve along an upsloping aggregate supply curve. True or False?arrow_forward
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