Question

6. Consider the IS-MP-Phillips curve framework. What happens to real interest rate R, short- run output Y, and change in inflation An to these events? Consider each event individually using graphs and assume the economy starts from the steady state. (a) (10 points) Japanese citizens get a sudden taste for American goods and American export to Japan sharply increases. The central bank decides not to respond. (b) (10 points) Japanese citizens get a sudden taste for American goods and American export to Japan sharply increases. The central bank decides to respond in order to bring output back to its potential level. (c) (10 points) Consumers feel pessimistic about the future and reduce their spending. The central bank decides not to respond. (d) (10 points) Consumers feel pessimistic about the future and reduce their spending. The central bank decides to respond in order to bring output back to its potential level.

Answer 1

A-6) ca LRPC LMI LM (O1V fatlar tion raten Int! 1 -- - 1 -- SRPCI -SRPC 11 S lowment Unemploymrate & Output & y Un Xt As exports " increases the IS curve of the will shift economy right wards to Is' and at neue nomy, swinm cauilibrine faint E rate of interest and Output has increased In the Phillips Curne, this leads to movement from point to point where unemployment rate has decreased and change in inflation rate has increased (bj central Bank will reduce the level of money supplies the economy shifting LM curve leftwards to LM', and new point E at where equilibrium back Output is y to a oint Es from to Ę movement is On there Curve, Philliks natural Outbut lend at mith at and un the inflation , LM Kalle BV El ration Int Ez ist u het et 7 PTE e 7- SRP Unemployment. - - - Seps ° Y, Output o un in Unemployment This will shift the Is curve leftwards to Is' and at new equilibrium point E, there is fall of interest rate and on that in economy. This increases unemployment rate and reduces change in inflation rate on Phillips Curve. a Central Bank will increase the amount of money in to LIMI and LM the economy unbhlied shifts E point where at Output is equilibrium new with level at new and natural equilibrium Eg is Phillips have. on