Econn-301 Final Examination Assignment Help-Using the AS-AD framework to answer the following questions
Problem 1. (ECON-301 Final Exam, Fall 2015). Use the AS-AD framework to answer the following questions. Assume that the economy starts in period 0 in the no-shock long-run equilibrium, in which ¯ a = 0, π0 = π−1 = ¯ π = 2%, ¯ o = 0, ˜ Y = 0. Assume also that ¯ v = 0.5, ¯ b = 2, and ¯ m = 1. Be sure to draw the relevant AS-AD diagram for each of your answers below.
- In period 1, the Fed decides to permanently decrease its inflation target to 1%. Examine the short-run and the long-run consequences of this change using the AS-AD diagram. Mark the points at which the economy is located in periods 1 and 2. Write down the equations for AS and AD curves in period 1 and find the equilibrium rate of inflation and short-run output in that period.
- Assume that the sensitivity parameter ¯ m in the AD curve is lower, that is, the Fed is less aggressive in responding to changes in the inflation rate. How will the equilibrium rates of inflation and output in period 1 compare to those in part 1 (you do not need to calculate the new values)? Illustrate both the original case (with ¯ m = 1) and the new case (with lower ¯ m) on the same AS-AD diagram showing the corresponding AS and AD curves only in periods 0 and 1.
- Draw two diagrams showing the evolution of inflation rate and short-run output over time starting with t = 0.
- Assume that instead of having adaptive expectations firms always expect inflation rate to be at the Fed’s target level. Answer the questions from part 1 under this assumption.
Problem 2. (ECON-301 Final Exam, Fall 2017). Use the AS-AD framework to answer the following questions. Assume that the economy starts in period 0 in the no-shock long-run equilibrium, in which ¯ a = 0, π0 = π−1 = ¯ π = 2%, ¯ o = 0, ˜ Y = 0. Assume also that ¯ v = 0.5, ¯ b = 2, and ¯ m = 1. Be sure to draw the relevant AS-AD diagram for each of your answers below.
- In period 1, the economy is hit by a positive inflation shock ¯ o = 2 which lasts for 1 period and goes away in period 2. Examine the consequences of this shock using the AS-AD diagram by showing the locations of AS and AD curves in periods from 0 to 3 and marking the corresponding equilibrium points. Write down the equations for AS and AD curves in period 1 and find π∗ 1 and ˜ Y ∗ 1 .
- Assume that the Fed’s monetary policy rule is more aggressive in responding to changes in inflation, that is, ¯m > 1. Graphically compare this case to the baseline from part 1. Specifically, draw the AS and AD curves in periods 0 and 1 and clearly mark the equilibrium points for both cases on the same AS-AD diagram.
- Consider again the baseline case with ¯ m = 1. Assume that, in addition to the inflation shock in part 1, in period 2 the economy experiences a positive aggregate demand shock ¯ a = 2 which lasts for one period. Illustrate this case using the AS-AD diagram showing the AS and AD curves in periods 0, 1, and 2. Find the equilibrium values of inflation and short-run output in period 2.
- Draw two diagrams showing the evolution of inflation rate and short-run output over time from t = 0 onwards for part 3. Makes sure to include the dynamics after period 2.
Problem 3. Consider the AS-AD model in which the central bank follows the so-called Taylor rule: Rt −¯ r = ¯ m(πt −¯ π) + ¯ n˜ Yt. Combine the Taylor rule with the IS curve equation to derive the new AD curve. How is it different from the baseline case considered in class? Illustrate both cases on the same AS-AD diagram.
