Question

For the questions on the following pages call the initial pre- shock point a and call the aftershock point b. I should see only points a and b in both graphs in the left side where you show the shock on the above curve on the above graph where you show the shock on the AE curve on the above graph, and on the Philips curve on the lower graph. (Both drawn and labelled carefully). In the first part of each question illustrate the shock described in the question using the AE/PC model without time lags as shown in chapter 12 i the textbook. (Use the AE and PC graphs similarly to the textbook. For your analysis choose as a starting point (marked A) an economy operating at potential GDP and at its inflation target. Also, on the left side, show point B where the economy is situated after the shock but prior to any Fed policy response. There should be an and b on both the upper and lower graphs. If point a and b are the same point then just mark that point with both an A and B.

Using the two graphs on the right side you'll show the Fed policy response. Start on the right side, showing staring point b on the upper and lower graphs. Indicate where economy is situated immediately after the after the described Fed response using a point C. There should be point’s b and c on both the upper and lower graphs even if they are in the same location. If the response has a stable outcome (if Y=Y* and /or the economy no longer requires more intervention from the Fed) then you can stop your analysis there. If the economy hasn't stabilized then you should continue showing your dynamic changes. If it’s appropriate use a D to show the final resting place of the economy. Some students may want to show an E but it isn't strictly necessary. If the economy returns to its initial position then mark either C= A= or D=A (or E=A) so I can see that you have found that outcome. If the economy doesn't return to its final resting point then I shouldn't see that marking.

Note: If you have a letter on the top graph you must indicate the associated position using that letter on the bottom one. ( so If there is an x on the top graph then there must be an X on the bottom graph. As an example of a common error: if B is located at Y> Y* on the upper graph then it makes no sense to have B at Y= Y* (or located at Y < Y* on the lower graph as this would suggest that B is associated with both a boom and at potential ( or a recession ) at the same time, which is contradictory.

Show the effects of the elimination of tariffs ( as a Supply shock only ) in 2017 with non accommodative monetary policy

(Four graphs)

Shock                                                     Response  

                                                             

Y*                                                               Y*

Show the same shock and policy response but now with lag

R^N

Y*

PIE*^T= 2%

4) Show a permanent infrastructure freeze in 2017 with counter cyclical monetary policy

Answer 1