Question

Assume no time lags. Political turmoil in the us leads to a none period adverse spending shock in 2018. The repercussions are felt globally causing exchange rate in developing countries to strong depreciate. The prices of imported goods in the us would fall except for the imposition of tariffs so the us economy experiences a one period adverse supply shock also felt in 2018. Call the initial pre shock point a and call the after shock point B. I should see points a and b I both graphs on the left ( both labelled carefully). Illustrate the shock described using the AE/PC model without time lags. ( Use the AE PC graph similarly to the textbooks). For your analysis, chose as a starting point, and economy operating at potential GDP and at its inflation target. Describe the appropriate feds response by following if it is following non accommodative monetary policy. The response should start with point b as earlier shown. Introduce point c to show the intervention ( in 2018 ) and point d to indicate the final outcome of the intervention.

Shock ( two graphs)                                                                        RESPOSE                                        

( SPACE)                                                                                       

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                y*                                                                                      y*

(SPACE)

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Answer 1