Over the medium run, the economy converges to the potential level of output and stable inflation....
Over the medium run, the economy converges to the potential level of output and stable inflation. Q: why does output decrease as the economy moves from A to A’? Q: what should the central bank do to reduce inflation?
Homework Answers
Q1)
Output decreases by moving from A to A’; it decreases by (Y0 – Yp). This happens because at A point the economy has inflationary gap since LRAS is in the left side of A.
Q2)
The central bank should take contractionary monetary policy in this regard. Under this policy, money supply in the economy would be low, people don’t have enough money to purchase or invest, making the inflation down; it happens above, since price becomes lower as P1.
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Over the medium run, the economy converges to the potential level of output and stable inflation....
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Macroeconomics, Chapter 9, Problem 5.
We were unable to transcribe this imaged. Compare the inflation and output outcomes in part (b) e. Which scenario, part (b) or part (c), do you think is more f. Suppose in period t4, the central bank decides to raise with that in part (c). realistic? Discuss the real policy rate high enough to return the economy immediately to potential output and to the period t...
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.
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