Use the IS-LM-PC model with an inflation-targeting central bank to answer the following short answer questions....
Use the IS-LM-PC model with an inflation-targeting central bank to answer the following short answer questions. In this question, you don’t need to explain or show the graph. But, when you’re not sure of the answer, don’t guess; instead, use the IS-LM-PC model to help you.
An increase in the risk premium. Inflationary expectations are adaptive.
i. What happens to inflation over time? ii. What does the central bank need to do to return to the medium-run equilibrium?
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Use the IS-LM-PC model with an inflation-targeting central bank
to answer the following short answer questions....
please answer Question 7: Inflation targeting and the Taylor rule in the IS-LM model Consider a...
please answer Question 7:
Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation,...
6. 7. Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy...
6.
7.
Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation, and Yn...
6. 7. Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy...
6.
7.
Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation, and Yn...
Consider our medium-run model of the economy: Y =C(Y-T)+I(Y,r+x)+G (IS) r=r (LM) TIt - Ilt-1 =...
Consider our medium-run model of the economy: Y =C(Y-T)+I(Y,r+x)+G (IS) r=r (LM) TIt - Ilt-1 = -a(ut – Un) (PC) Suppose the economy starts at a point such that ut = Un and r = rn. Graph the effects of a financial shock that increases the risk premium, x. What happens to output, the interest rate, and inflation in the short-run? What happens in the medium-run? What mechanism causes the transition from the short-run equilibrium to the medium-run equilibrium?
1. Use the IS-LM model to show how an unexpected inflation could result in a higher...
1. Use the IS-LM model to show how an unexpected inflation could result in a higher short-run GDP. 2. Use the IS-LM model to show how an expected inflation could result in a higher short-run GDP. Explain using an IS-LM diagram. Make sure you explain in words what happens in your diagram.
3 2. Use the IS-LM model to show how an expected inflation could result in a...
3 2. Use the IS-LM model to show how an expected inflation could result in a higher short-run GDP. Explain using an IS-LM diagram. Make sure you explain in words what happens in your diagram.
1. Use the IS-LM model to show how an unexpected inflation could result in a higher...
1. Use the IS-LM model to show how an unexpected inflation could result in a higher short-run GDP. 2. Use the IS-LM model to show how an expected inflation could result in a higher short-run GDP. Explain using an IS-LM diagram. Make sure you explain in words what happens in your diagram. 3) Suppose a closed economy is initially in the long run equilibrium. Suppose the monetary base of this economy is $100 million, of which people carry $10 million...
According to the IS-LM model, what happens in the short run to the interest rate, income,...
According to the IS-LM model, what happens in the short run to the interest rate, income, consumption, and investment under the following circumstances? Be sure your answer includes an appropriate graph. The government increases taxes. ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ The price level decreases. ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ The central bank increases the money supply. ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ The government decreases government purchases. ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
1. (The IS-LM-PC model): Assume the following relations characterize the goods market: (i) 1128 +...
1. (The IS-LM-PC model): Assume the following relations characterize the goods market: (i) 1128 +0.2Y 300(rt + xt) (iii)G,-215 :T t = 200 (iv)st= 0.15 or 15% e) Derive the IS curve (as a relation between Y and r). (b) Assume the LM curve is given by r 0.16 (ie. in period t, the central bank sets the real interest rate at 16%). What is the short-run equilibrium level of output (Yt )? (c) Suppose that L = 2000 and...
Section B: Short-answer Questions Answer BOTH Questions 21 and 22. You are expected to provide written...
Section B: Short-answer Questions Answer BOTH Questions 21 and 22. You are expected to provide written explanations for all your answers in the script book. Question 21 (15 marks) Assume that before the changes, the economy was at the natural level of output and the central bank uses an interest rate rule with a price level target. (a) Show the effects of a reduction in consumer confidence on the position of the AD/AS and IS/LM curves in the short and...
please answer Question 7:
Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation,...
6.
7.
Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation, and Yn...
6.
7.
Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation, and Yn...
Consider our medium-run model of the economy: Y =C(Y-T)+I(Y,r+x)+G (IS) r=r (LM) TIt - Ilt-1 = -a(ut – Un) (PC) Suppose the economy starts at a point such that ut = Un and r = rn. Graph the effects of a financial shock that increases the risk premium, x. What happens to output, the interest rate, and inflation in the short-run? What happens in the medium-run? What mechanism causes the transition from the short-run equilibrium to the medium-run equilibrium?
3 2. Use the IS-LM model to show how an expected inflation could result in a higher short-run GDP. Explain using an IS-LM diagram. Make sure you explain in words what happens in your diagram.
1. (The IS-LM-PC model): Assume the following relations characterize the goods market: (i) 1128 +0.2Y 300(rt + xt) (iii)G,-215 :T t = 200 (iv)st= 0.15 or 15% e) Derive the IS curve (as a relation between Y and r). (b) Assume the LM curve is given by r 0.16 (ie. in period t, the central bank sets the real interest rate at 16%). What is the short-run equilibrium level of output (Yt )? (c) Suppose that L = 2000 and...
Section B: Short-answer Questions Answer BOTH Questions 21 and 22. You are expected to provide written explanations for all your answers in the script book. Question 21 (15 marks) Assume that before the changes, the economy was at the natural level of output and the central bank uses an interest rate rule with a price level target. (a) Show the effects of a reduction in consumer confidence on the position of the AD/AS and IS/LM curves in the short and...
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