Question

In: Economics

Using the IS-MP model with Phillips curve, show why the Fed has limited abilities during bouts...

Using the IS-MP model with Phillips curve, show why the Fed has limited abilities during bouts of stagflation. For this version of stagflation, assume that there's a supply shock but LaTeX: \tilde{Y}Y ~remains at LaTeX: \tilde{Y} = 0Y ~ = 0 and LaTeX: \piπ is higher after the shock.

Solutions

Expert Solution

Stagflation is caused due to shocks on the supply side which causes prices to rise and business costs to shoot up. The explaination of the Fed's ability to stimulate the economy is due to the threat of further price increase after increasing money supply. The logical flow is explained in the solution along with diagrams for assistance. Please read the solution and then tyr ot make sense of the diagrams.

Rahul Sunny answered 7 months ago
Next > < Previous

Related Solutions

Derive the aggregate demand curve using both the expenditure function and the MP curve (show these...
Derive the aggregate demand curve using both the expenditure function and the MP curve (show these graphic derivations separately). These two derivations give slightly different representations of the AD curve. Explain the difference.
Draw the full short- run model graph (IS/MP and the corresponding Phillips Curve).  You must fully label...
Draw the full short- run model graph (IS/MP and the corresponding Phillips Curve).  You must fully label all axis with both symbols and verbally. (for example  (symbol) is inflation (verbal)).  Start the economy at full employment with inflation equal to the central bank target (2%) and label that point "A". Then, assume the central bank decides to lower interest rates to boost employment.  Demonstrate how this influences the short-run model (shift appropriate curves and show a move along appropriate curves). Label the new short...
Draw the full short- run model graph (IS/MP and the corresponding Phillips Curve).  You must fully label...
Draw the full short- run model graph (IS/MP and the corresponding Phillips Curve).  You must fully label all axis with both symbols and verbally. (for example (symbol) is inflation (verbal)).  Start the economy at full employment with inflation equal to the central bank target (2%) and label that point "A". Then, assume the central bank decides to lower interest rates to boost employment.  Demonstrate how this influences the short-run model (shift appropriate curves and show a move along appropriate curves). Label the new...
Draw the modern Phillips Curve and assume v of the Phillips Curve is 1. Show and...
Draw the modern Phillips Curve and assume v of the Phillips Curve is 1. Show and explain the effects of the crisis. By exactly how much should inflation change? Be sure to label everything.
The labour market model and the Phillips curve show that the economy of Country X is in equilibrium with stable prices.
The labour market model and the Phillips curve show that the economy of Country X is in equilibrium with stable prices. Suppose the economy experiences a positive shock to aggregate demand which causes the unemployment rate to fall by 2%.a. Draw the labour market model and the Phillips curve to show the before and after a positive demand shock situation in country X. b. What will be the effect of the shock on the bargaining gap and the price level...
1.(i) Using the AD/AS model, discuss the changes to the economy that the Phillips curve explains...
1.(i) Using the AD/AS model, discuss the changes to the economy that the Phillips curve explains well, and describe under what conditions the Phillips curve fails to explain economic behavior. Include graphs of the Phillips curve and the AD/AS model in your answer 2.(ii) In the late 1990s, the U.S. economy experienced a period of extremely low inflation and extremely low unemployment. Use the AD/AS model to explain what sort of change in the economy would cause this. Include a...
Which of these curves (MP curve, IS curve, Phillips curve) do you think have been impacted by the Covid-19 crisis? How so?
  Which of these curves (MP curve, IS curve, Phillips curve) do you think have been impacted by the Covid-19 crisis? How so?
Using the IS curve Fed rule model, explain what happens to the equilibrium values of the...
Using the IS curve Fed rule model, explain what happens to the equilibrium values of the interest rate and output if: a) There is an increase in T with the money supply held constant b) A decline in G with the Fed changing the money supply enough to keep output constant c) An increase in P with no change in government spending or taxes
When answering parts a and b, draw the relevant Phillips curve. Using a short-run Phillips curve,...
When answering parts a and b, draw the relevant Phillips curve. Using a short-run Phillips curve, what is the effect on the unemployment rate if the inflation rate unexpectedly rises. Using a long-run Phillips curve, what is the effect on the unemployment rate if the inflation rate rises and people expect the rise. Explain how your answer to part a about the unexpected rise in the inflation rate changes in part b as the inflation rate becomes expected.
b) Explain why the Phillips curve relationship in the basic New Keynesian model takes the form...
b) Explain why the Phillips curve relationship in the basic New Keynesian model takes the form it does.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT