Consider the AD-AS model discussed during the lectures. Assume that the aggregate demand curve is given by Y=8-0.5 π, th
Posted: Sun May 08, 2022 9:35 am
Consider 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 by r=1+0.3 π.
(a)What is the economic interpretation behind the aggregate
demand curve? How does investment change when you move along the AD
curve by considering combinations for which inflation decreases and
output increases? (5 marks)
(b)Suppose the economy is in equilibrium at the potential level
of output, with inflation expectations equal to actual inflation,
which equals 2%. A loss of consumer confidence hits the economy and
leads to a sudden drop in consumption. 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. (8 marks)
(c) Is fiscal policy more useful, less useful or equally useful
compared to monetary policy to avoid the loss of confidence
generating a recession? Discuss and compare how fiscal and monetary
policy can be separately used in response to the dynamics caused by
the loss of consumer confidence. (12 marks)
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 by r=1+0.3 π.
(a)What is the economic interpretation behind the aggregate
demand curve? How does investment change when you move along the AD
curve by considering combinations for which inflation decreases and
output increases? (5 marks)
(b)Suppose the economy is in equilibrium at the potential level
of output, with inflation expectations equal to actual inflation,
which equals 2%. A loss of consumer confidence hits the economy and
leads to a sudden drop in consumption. 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. (8 marks)
(c) Is fiscal policy more useful, less useful or equally useful
compared to monetary policy to avoid the loss of confidence
generating a recession? Discuss and compare how fiscal and monetary
policy can be separately used in response to the dynamics caused by
the loss of consumer confidence. (12 marks)