Consider an AD-AS model with AD curve Y – Y* = - αγ (π - π*) + εand AS curve π = π + φβ(Y – Y*) + εwith parameter values α = 0.5, γ = 1, φ = 1, β = 0.5,and with inflation target π* = 0.02 and potential output normalised to Y* = 1.Starting from a long-run equilibrium with π = π* suppose there is a temporary demand shock ε = -0.05. Which of the following is TRUE? 1.In the short run, output is 5% below trend 2.In the short run, output is 4% below trend 3.In the short run, inflation is 1% 4.In the long run, output is 5% below trend

Consider an AD-AS model with AD curve Y – Y* = - αγ (π - π) + εand AS curve π = π + φβ(Y – Y) + εwith parameter values α = 0.5, γ = 1, φ = 1, β = 0.5,and with inflation target π* = 0.02 and potential output normalised to Y* = 1.Starting from a long-run equilibrium with π = π* suppose there is a temporary demand shock ε = -0.05. Which of the following is TRUE? 1.In the short run, output is 5% below trend 2.In the short run, output is 4% below trend 3.In the short run, inflation is 1% 4.In the long run, output is 5% below trend

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter7: Inflation

Section: Chapter Questions

Problem 13SQ

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Consider the AD-AS model Y = Y* — ay(π − π* ) + €D - π = π² + OB(Y−Y*) + €s Suppose the parameter values are a = 0.5, y = 2, p = 0.5, ß = 1 with inflation target * = 0.02 and natural output normalized to Y* = 1. = Suppose the economy begins in an initial long run equilibrium and there is then a temporary demand shock Ep = -0.05. In the short run, immediately following this shock, output and inflation are given by: Y = 1.025, π = -0.005 Y = 0.975, π = +0.005 Y = 1.025, π = +0.005 Y = 0.966, π = -0.003
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