Suppose an economy in inflation expectations are formed adaptively, that is, E, 74+1 = and in which the monetary policy

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Suppose An Economy In Inflation Expectations Are Formed Adaptively That Is E 74 1 And In Which The Monetary Policy 1 (107.3 KiB) Viewed 35 times

Suppose an economy in inflation expectations are formed adaptively, that is, E, 74+1 = and in which the monetary policy follows the Taylor principle and adjusts the nominal interest rate by more than the change in the inflation rate and in the same direction, as graphically represented by the appropriate Dynamic Aggregate Demand line. Further, assume the economy has been in its long-un equilibrium, that is, output at its long-run value and inflation rate at the target set by the monetary authority until period t-1. The following equation describes the Dynamic Aggregate Supply line for period t-1: 1-2-3'+(-v). where is the inflation target and the potential or long-run equilibrium of output. 1) Assume that a shock , increases the pret the economy in period t, but subsequently vanishes. As a result, output is above its long-run level Y and exceeds demand. Given the predictable consequences for the direction of change of inflation, the Dynamic Aggregate Supply line Font will be given by which of the equations below: OA Ов, -0 Oc. 4-lv-»). 4**[v-Y)-2 4***][v-Yoo 4** **[v-Y) + OD 2) The graphical representation of the period t Dynamics Aggregate Supply above will be a line that goes through which point in the graph below: : TT + A B π' + υι с * TT TT - Ut D E E F Y O A. Point OB. Point OC. Point OD Point OE Point A OF. Point 3) In period t, the short-run equilibrium will be characterized by OA Output above its long-run equilibrium Yand inflation between x' - 4 and x' ов. Output below itslong-run equilibrium Y and inflation below a' - - OC. Output above its long-run equilibrium Yand inflation between s' and ' + OD. Output above its long-run equilibrium Y and inflation below :* - -