Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 9, Problem 6E
(a)
To determine
The effect of an incorrect interpretation and time lag in the analysis of potential output.
(b)
To determine
The effect of an incorrect interpretation of a rise in output on the level of inflation.
(c)
To determine
The effect of an incorrect interpretation of a fall in the growth rate of output.
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Students have asked these similar questions
(1) Suppose the economy is in long-run equilibrium. If there is a sharp increase in the expected price level, what do we expect to happen?
Select one:
(A) In the short run, the SRAS curve will shift left, real GDP and price will fall.
(B) In the short run, SRAS will shift right, real GDP will rise and prices will fall.
(C) In the short run, AD will shift left, real GDP and prices will fall.
(D) In the short run, LRAS and SRAS will shift left, causing real GDP to fall.
In the New Keynesian model, suppose that in the short run the central bank cannot observe aggregate output or the shocks that hit the economy. However, the central bank would like to come as close as possible to economic efficiency. That is, ideally the central bank would like the output gap to be zero. Suppose initially that the economy is in equilibrium with a zero-output gap.
(a) Suppose that there is a shift in money demand. That is, the quantity of money demanded increases for each interest rate and level of real income. How well does the central bank perform in relative to its goal? Explain using diagrams.
(b) Suppose that firms expect total factor productivity to increase in the future. Repeat part (a).
(c) Suppose that total factor productivity increases in the current period. Repeat part (a).
(d) Explain any differences in your results in parts (a)–(c) and explain what this implies about the wisdom of following an interest rate rule for the central bank.
Problem 6 assumes that…
A) Distinguish between the short run and the long run as they relate to macroeconomics. Why is the distinction important?
B) Use graphical analysis to show how each of the following would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output, that prices and wages are eventually flexible both upward and downward, and that there is no counteracting fiscal or monetary policy.
i) Because of a war abroad, the oil supply to the United States is disrupted, sending oil prices rocketing upward.
ii) Construction spending on new homes rises dramatically, greatly increasing total U.S. investment spending.
iii) Economic recession occurs abroad, significantly reducing foreign purchases of U.S. exports.
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- “The oil Price run-up of 2007-08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. The experience of 2007-08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.” a) Oil price shocks have an evident impact on the short run aggregate supply curve. With the help of a graph demonstrate how rising oil prices affect the SRAS and explain what other factors can cause this shift. b) Different theories attempted to explain why SRAS curves slope upwards. Identify and explain these theories explaining what they have in common.arrow_forwardFor each of the following scenarios predict how the price level and output will change over time from immediate impact to long-run impact. In each case, consider an economy that was initially producing at its level of potential output. a. The government passes legislation that increases corporate taxes by 25%. b. Economies around the globe are experiencing a time of prosperity and, as a result, demand for U.S. exports increases.arrow_forwardAn economy has an unemployment rate of 11% and real GDP grows by 2.5% annually. A treasury official says next year's expected growth rate of 4% is ecpected to bring down the enemployment rate to 8% within one year. However, an economists disagrees as it is non consistent with macroeconomic research. -who is correct? the treasury official or the economist and why?arrow_forward
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