Consider an economy producing at Y, = 0 and ū = 1/4. The inflation rate at t = 0 is no = 3% . Now, suppose the economy is hit by an inflation shock ōj = ōz = 3%. The shock is temporary and ö = 0 for t > 2. For the duration of the inflation shock, the economy is in a recession with Ý1 = Y2 = -1%, which ends with Y3 = 0. Based on this information, you know that the inflation rate 73 i percent.
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- The table below reports the actual inflation rate from 2016 to 2020. Complete the table, assuming people form expectations adaptively. Give all answers to two decimals. Year 2016 2017 2018 2019 2020 Actual inflation rate 3% 4.50% 7.00% 6.00% 4.00% Expected inflation rate a) d) e) 3% 4.50% % % % b) c) f) Error 0% 1.00% % % %In a particular economy the real money demand function is Real Interest Rate, r (%) 0.451 M 0.40- 3,000 + 0.10Y-9,000i. P 0.35- Assume that M = 7,000 and P = 2. Initially, expected inflation, zewas 0.02. Initially, when Y= 8000, the real interest rate of 0.013 cleared the asset market and when Y = 9000, the real interest rate of 0.024 cleared the asset market. The initial LM curve is drawn as 0.30- 0.25 0.20- LM,. 0.15- Now suppose that the expected inflation rate increases to 0.03. Using the new expected inflation rate, calculate the real interest rate that clears the asset market when Y = 8000. (Enter your answer in decimals, rounded to three decimals.) D. This is point C. 0.10- LM, 0.05- 0.00+ 7 8 10 Output, Y (thousands)Assume that the price level in an economy is stable with expected inflation initially equal to 3% in period 0. Further assume the economy is then hit by an expansion at the beginning of period 1, and employment remains at a constant high level until the beginning of period 4. With ‘time period’ on the xaxis and ‘inflation rate’ on the y-axis: (i) Plot the path of the bargaining gap (assume it is equal to 1%), inflation and expected inflation from period 1 to the end of period 4. (ii) Provide some reasons for why the bargaining gap might disappear after period 4, and state any other assumptions you are making. (iii) Explain how an increase in the central bank’s policy interest rate would affect the exchange rate through the market for financial assets (such as government bonds). What impact would this have on aggregate demand?
- QUESTION 7 Consider the following Taylor rule i=0.02+0.5y+0.5 (n- 2% ) where y is the percentage difference between the actual output and its full-employment level, while is inflation over the last 12 months. The evolution of the economy is described by the following data: Full-emp't output Actual output Price level January, 2050 February, 2050 March, 2050 100.00 100.00 100.00 100.00 101.41 99.52 100.00 102.31 104.71 April, 2050 Мay, 2050 100.00 101.31 102.58 100.00 100.10 99.64 June, 2050 100.00 101.89 100.07 July, 2050 August, 2050 September, 2050 October, 2050 100.00 100.55 100.71 100.00 100.83 99.20 100.00 99.75 98.40 100.00 99.95 101.82 November, 2050 100.00 98.54 98.83 December, 2050 100.00 97.52 98.68 100.00 97.43 percent. January, 2051 98.10 According to the Taylor rune, in January 2051 the central bank must have set the interest rate at Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct…1. Imagine an economy, where the SRAS in terms of inflation is given by II=5+Y, where Y is output. Imagine that the long run AS curve is given by Y=2. (25 marks) a) Give the equation of the AD curve (you can take liberties), if we assume that initially, the economy is at its long-run equilibrium. Justify. b) Imagine that your chosen AD curve's intercept goes up by one unit due to an expansionary monetary policy. What will be the new final equilibrium after this change? Justify. c) What will be the equilibrium after two periods of adjustment? Justify. d) Assume that before all the changes in the economy, in the initial, long-run equilibrium, the interest rate was 4 percent. Give an IS and an LM curve that are compatible with this initial equilibrium. Justify. e) What are the IS and LM curves going to be at the very end of the adjustment process, i.e., in the new long run equilibrium? Justify.The text proposes the following model of expected inflation x = (1 - 0) x + 0,-1 What do we know about your process of the formation of expected inflation when 0 = 07 OA. Neither last year's inflation rate nor the long-run average inflation rate impact your view on this year's expected rate. OB. Last year's inflation rate will influence you to revise your estimates for this year's expected rate. OC. Regardless of what inflation was last year, you would expect it to be at the long-run average inflation rate this year. OD. Last year's inflation rate and the long-run average inflation rate have an equal impact on your view of this year's expected rate. What do we know about your process of the formation of expected inflation when 0-17 OA. Neither last year's inflation rate nor the long-run average inflation rate impact your view on this year's expected rate OB. Last year's inflation rate will be the only input for you to revise your estimates for this year's expected rate regardless of…
- Suppose that people consume only three goods, as shown in this table: 2020 Price Quantity 2021 Price Quantity Tennis Balls Percentage Change $2 100 True $2 100 False Golf Balls Bottles of Gatorade $4 100 $6 100 Complete the following table by computing the percentage change in price for each of the three goods. $2 200 $3 200 Tennis Balls Golf Balls Bottles of Gatorade 0% 50% Using a method similar to that used to calculate the consumer price index, the percentage change in the overall price level is 50 True or False: If you were to learn that a bottle of Gatorade increased in size from 2020 to 2021, that information would raise your estimation of the inflation rate. %1. For this question assume that inflation is zero. Consider a 2-period economy. Assume that consumer's lifetime utility is given by: U = log c, + 0.9 log c2 Assume that the consumer starts period 1 with the initial wealth of 50,000. The consumer gets labour income y, - T; in period t (t=1,2), where: y1 = 25,000, y2 = 120,000, T, = 5,000, T, = 12,200 and R=0.05 Initially assume that there are no borrowing constraints. a. Write down the Euler equation (with all values substituted) and explain its meaning. Write the intertemporal budget constraint and explain its meaning. b. Solve the consumer's problem of maximizing lifetime utility subject to the intertemporal budget constraint. Is the present value of consumption in the first and the second periods the same? Explain why. c. If for some reason the consumer were to face the borrowing constraint, would it be binding? Explain.. d. Assume that in the economy described in this part, the government decides to build some new roads in period…In a decelerating inflation environment (e.g. with inflation rate at 20%, 18%, 14%, .. year after year), using "adaptive inflation expectations" formation, the forecasted future inflation rate is likely to be O systematically biased upward. O systematically biased downward. O always correct. O about correct on average.
- Assume that an increase in aggregate demand results in a positive bargaining gap which is constant at 2%. The rate of inflation in future years will: Select one: a.Fall by 2% each year b.lncrease by 2% each year c.Remain constant at 2% per year d.Remain unchangedSuppose that inflation increases from Year #1 to Year#2 without growth. Which of the following graphs correctly shows this situation? (Note: Year #2 positions are shown with dark blue lines.) Price Level Price Level a Ps 0 1 LRAS QN Q₁ LRAS ON 0₁ A) Graph A B) Graph B C) Graph C D) Graph D SRAS SRAS UI SRAS, AD, (M-$800 billion; V - 3) MTD AD₂ (M-$820 billion; V = 3) SRAS, (c) MVT Real GDP AD₂ (M-$800 billion; V - 4) AD, (M-$800 billion; V - 3) Real GDP Price Level Price Level Qa 0 ON P₁ O -- 1 1 0₁ ON 2 -=-= LRAS 1 T LRAS 6 ở SRAS, SRAS₂ AD, (M-$800 billion; V-3) (b) AD₂ (M-$780 billion; V- 3) SRAS1 MIV SRAS2 (d) MV↓ Real GDP AD, (M-$800 billion; V-3) AD₂ (M-$900 billion; V=2) Real GDPQUESTION 7 Consider the following Taylor rule i=0.02+0.5y +0.5 (T-2% ) where y is the percentage difference between the actual output and its full-employment level, while is inflation over the last 12 months. The evolution of the economy is described by the following data: Full-emp't output Actual output Price level January, 2050 February, 2050 March, 2050 100.00 100.00 100.00 100.00 101.41 99.52 100.00 102.31 104.71 April, 2050 May, 2050 100.00 101.31 102.58 100.00 100.10 99.64 June, 2050 100.00 101.89 100.07 July, 2050 August, 2050 September, 2050 100.00 100,55 100.71 100.00 100.83 99.20 100.00 99.75 98.40 October, 2050 100.00 99.95 101.82 November, 2050 100.00 98.54 98.83 100.00 100.00 December, 2050 97.52 98.68 January, 2051 97.43 98.10 According to the Taylor rune, in January 2051 the central bank must have set the interest rate at Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that…