Documente Academic
Documente Profesional
Documente Cultură
b b 2 4ac
2a
to solve P
[DAD]
[DAS]
Inflation
DASt-1= DASt
t*
DADt-1
Y all
c.
d.
What will be the location of DASt+2? Show the equilibrium point D. [1 mark]
What will be the location of DAD after two periods after the expiry of the demand
shock? What will be the final equilibrium point? [2 marks]
If inflation is one percent, then the short-run unemployment rate will be 4 percent.
If deflation is one percent, then the short-run unemployment rate will be 8
percent.
2.
Disinflation of one percent will lead to loss of GDP by four percent. In other
words, sacrifice ratio is 4. According to Lucas critique, sacrifice ratio is overmagnified. Sacrifice ratio will be zero, if policies to fight inflation are credible
and fully anticipated.
3.
The inside lag is the time between a shock to the economy and the policy action
responding to the shock. Both fiscal and monetary policy have relatively long
inside lags.
4.
5.
6.
The Phillips curve shifts upward when adverse supply shock, for example, higher
prices of raw-materials (due to poor harvests), occurs.
7.
Consider the short-run aggregate supply of Y=YF + 500(P EP), where Y is the
actual output, YF is the potential output, P is the actual price and EP is the
expected price. The output will be at the natural rate when actual price level (P) is
equal to expected price level (EP). The slope of SRAS curve is 500.
8.
According to the Phillips curve in chapter 14, inflation rate depends on the
following:
Previously expected inflation
An exogenous supply shocks
Deviation of output from natural rate
9.
10.
The AD curve in Chapter 13 is drawn with P in the vertical axis and Y in the
horizontal axis. The AD curve is drawn in Chapter 14 with in the vertical axis
and Y in the horizontal axis. Both AD curves explain the effects of lower r on
investment. Both AD curves use Taylors rule.
11.
Expected price (EP) (which depends on previous years price) is a lagged variable
in SRAS function of Chapter 13
12.
13.
14.
The dynamic aggregate demand (DAD) equation uses Fisher equation (with i, r
and ) and adaptive expectation.
15.
The equation of nominal rate (i) = + 2.0 + 0.5( -2.0) + 0.5(GDP gap) is the
central bank policy rule equation.
If is 4 percent and the GDP gap is 2 percent, the central bank should set nominal
rate at 8 percent.
16.
Favourable supply shocks (lower V) shift the DAS curve to the right. As a result,
short-run equilibrium decreases, but long-run equilibrium remains unchanged
17.
Assume that the Bank of Canadas target unemployment rate is 6 percent and its
monetary policy is based on adjustment of money supply (M). The Bank of
Canada will increase money supply (M) whenever actual unemployment rate
exceeds target unemployment rate
18.
There will be a leftward of the DAS curve in year t if there was inflation in the
previous year. In the dynamic model of DAD/DAS, one period of time is
connected with next period of time through inflation expectations.
19.
Proponents of real business cycle theory assume that the most fluctuations of
output represent changes in the natural rate of output.
20.
21.
22.
Answer Questions #23-25 on the basis of central banks response function outlined
below.
it = t + rnt + 0.5(t - *t) + 0.5(GDP Gap)
Assume that central banks inflation target is 2 percent
Real natural rate of interest at (full-employment) potential YP is 2 percent.
23.
Assume that V increases and increases to 3 and GDP gap becomes 0.5.
Short-run equilibrium solutions are:
Nominal interest rate (i) = 5.25
=3
Real interest rate = 2.25
Long-run equilibrium solutions:
Nominal interest rate (i) = 4
=2
Real interest rate = 2
24.
25.
Consider a favourable one year increase in G due to temporary fiscal stimulus and
a rightward shift of the DAD curve
Short-run equilibrium will be higher than * and Y will be higher than YP.
Once the fiscal stimulus discontinued, there will be a leftward shift of the DAD
curve and Y will fall short of YP. Central bank policy rule kicks in and finally
decreases to * and Y settles at YP.
A
A
A
A
A
16.
17.
18.
19.
20.
A
A
A
A
B
21.
22.
23.
24.
25.
A
A
A
A
A
False