Suppose the economy is initially in long-run equilibrium and experiences a favourable inflation shock. a) Explain...

Suppose the economy is initially in long-run equilibrium and experiences a favourable inflation shock. a) Explain how the SRAS line is affected in the short-run. b) Use your result for part (a) along with the AD-AS diagram to illustrate and explain what will happen to output and inflation in both the short-run and the long-run if the Reserve Bank accommodates the favourable inflation shock. c) Use your result for part (a) along with the AD-AS diagram to illustrate and explain what will happen to output and inflation in both the short-run and the long-run if the Reserve Bank does not accommodate the favourable inflation shock.

Solutions

Expert Solution

Rahul Sunny answered 1 month ago

Next > < Previous

Related Solutions

Suppose the economy is initially in long-run equilibrium and there is a positive demand shock. Using...

Suppose the economy is initially in long-run equilibrium and there is a positive demand shock. Using the AD-AS diagram clearly describe the effects of the demand shock in the short run and how the economy will adjust through the self-correcting mechanism in the long run

Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose...

Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose politicians believe that the current level of output is too low and encourage the central bank to engage in expansionary monetary policy. a. (4 points) Discuss two ways in which the Central Bank can try to increase the money supply. Be explicit. b. (6 points) What are the effects of the expansionary policy in the short run? Show in the appropriate graph(s). c. (5...

Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose...

Suppose the U.S. economy was in both short-run and long-run equilibrium, until the economy experienced inflation....

Suppose the U.S. economy was in both short-run and long-run equilibrium, until the economy experienced inflation. a. Which policy would be consistent with the goals of monetary policy during this time? The Fed repos $25 billion worth of Treasury bonds to non-bank financial firms. The Fed reduces the discount rate from 7 percent to 5 percent. The Fed reduces the reserve ratio from 20 percent to 15 percent. The Fed sells securities worth $100 million to financial institutions.

England in 1997. Suppose the economy of England is initially in a long run equilibrium. Draw...

England in 1997. Suppose the economy of England is initially in a long run equilibrium. Draw a Keynesian Cross (AE/AP). AD/AS diagram, IS/LM diagram, and Money Market diagram for England. Label Everything

53.) Assume that the economy is initially in a long-run equilibrium. Now suppose that businesses and...

53.) Assume that the economy is initially in a long-run equilibrium. Now suppose that businesses and households become more pessimistic about the future and decide to invest less in new structures, tools, and equipment, and also decide to engage in less consumption spending, at the current price level. a.) What will happen to output and the price level in the short run? Output will (rise, fall, stay the same) and the price level will (rise, fall, stay the same). (2...

Question 1: The AD-AS Model Suppose the economy is initially in long-run equilibrium, and there is...

Question 1: The AD-AS Model Suppose the economy is initially in long-run equilibrium, and there is a positive demand shock. a. Describe the short-run effects of this positive demand shock on output, unemployment, and prices. b. Describe how the economy will automatically move back to the potential level of output in the long run. c. Illustrate your answers in point (a) and (b) using an AD-AS graph. Show the short-run effects and the long-run adjustments.

Suppose the economy is initially in the long-run equilibrium, but a drop in consumer confidence causes...

Suppose the economy is initially in the long-run equilibrium, but a drop in consumer confidence causes the AD curve to shift to the left. What will be the impact on prices and output in the short run and long run? Select the correct answer below: In the short run, and long run, both prices and output will fall. In the short run, prices will fall, but output will stay the same. In the long run, both prices and output fall....

Suppose the economy is initially at a long-run equilibrium. Then the central bank increases the money...

Suppose the economy is initially at a long-run equilibrium. Then the central bank increases the money supply. Assuming any resulting inﬂation is unexpected, explain any changes in GDP, unemployment, and inﬂation in the short-run that are caused by the monetary expansion. Explain your conclusions using three diagrams: (i) one for the IS-LM model, (ii) one for the AD-AS model, and (iii) one for the Phillips curve.

QUESTION 30 Suppose the economy is in long-run equilibrium at an inflation rate of 1% Then...

QUESTION 30 Suppose the economy is in long-run equilibrium at an inflation rate of 1% Then inflation expectations rise to 2% and inflation rises to 3%. The increase in expected inflation shifts the short-run Phillips curve a. left. Overall, unemployment moves above its natural rate. b. left. Overall, unemployment moves below its natural rate. c. right. Overall, unemployment moves below its natural rate. d. right. Overall, unemployment moves above its natural rate. At a given price level, an increase in...

Subjects