Question

Consider an economy that abides by a Dynamic AS/AD model as presented in class, which, in period t-1, is in a short equilibrium that happens to coincide with a long run equilibrium. In period t there is a adverse supply shock. The shock remains for 2 periods (t, t+1), but then dissipates fully in period t+2. Describe how this economy reacts to this shock from periods t-1 through t+2. Also discuss how the economy might transition to a LR equilibrium. Graphs of DAD/DAS space and written discussion are required.

Answer #1

Consider an economy that abides by a Dynamic AS/AD model as
presented in class, which, in period t-1, is in a short equilibrium
that happens to coincide with a long run equilibrium. In period t
there is a negative supply shock which dissipates in period t+1.
There are two types of policy makers: hawks and doves. Which is
true?
A. The size of the leftward shift of DAS in t is the same for
Hawks and Doves
B. The size...

Consider an economy that abides by a Dynamic AS/AD model as
presented in class, which, in period t-1, is in a short equilibrium
that happens to coincide with a long run equilibrium. In period t
there is a negative supply shock which dissipates in period t+1.
There are two types of policy makers: hawks and doves. Which is
true?
A. The size of the leftward shift of DAS in t+1 is less for
Hawks than Doves
B. The size of...

Consider the closed-economy model.
(a) Use IS-LM and AD-AS diagrams to show what happens to the
economy in the short-run, long-run, and during the transition,
following an adverse supply shock . Explain in words what is
happening.
(b) Suppose the central bank wishes to achieve output stability;
that is, suppose the central bank would like to keep Y from ever
changing. In response to the change in P from the adverse supply
shock, what, if anything, can the central bank...

in the dynamic model of AD-AS, the economy is in . long run
equilibrium in year 1 and is expected to be in short-run
equilibrium bellow potential GDP in year 2, and the federal reserve
pursues the appropriate policy, because policy will work more
quickly than the automatic adjustment mechanism this will result
in.
A) real GDP lower than what would occur if no policy had been
pursued.
B) unemployment rates higher than what would occur if no policy had...

in the dynamic model of AD-AS, the economy is in . long run
equilibrium in year 1 and is expected to be in short-run
equilibrium bellow potential GDP in year 2, and the federal reserve
pursues the appropriate policy, because policy will work more
quickly than the automatic adjustment mechanism this will result
in.
A) real GDP lower than what would occur if no policy had been
pursued.
B) unemployment rates higher than what would occur if no policy
had...

Consider the following Keynesian (short-run) model along with
the Classical (long-run) model of the economy.
Labor Supply: Le = 11
Capital Supply: K=11
Production Function:
Y-10K.3(Le).7
Depreciation Rate: &=.1
Consumption Function: C=12+.6Yd
Investment Function: I= 25-50r
Government Spending: G=20
Tax Collections: T=20
Money Demand Function: Ld=
2Y-200r
Money Supply: M=360
Price Level: P=2
Find an expression for the IS curve and plot it.
Find an expression for the LM curve and plot it.
Find the short run equilibrium level of...

Consider a one-period closed economy, i.e. agents (consumers,
ﬁrms and government) live for one period, consumers supply labor
and demand consumption good, whereas their utility function is in
the form of log(C−χN1+ν/1+ν ) (GHH preference). Firms supply
consumption good and demand labor and their production function is
y = zN^1−α. The government ﬁnances an exogenous spending via
lump-sum taxes. Suppose there is a positive shock on χ which means
the consumers favor leisure (or dislike labor) by much more than...

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