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- a) Using aggregate supply and demand curves illustrate the different effects on output of demand-pull and cost-push inflation. b) Show using an aggregate supply and demand curve diagram, how an initial increase in aggregate demand though monetary policy may have no effect on output if workers with "rational expectations" seek wage rises to compensate for the expected higher price level. Accessibility: Good to go WA. What assumptions did Thomas Sargent make when he claimed that inflation is always and everywhere a fiscal phenomenon?" B. Why is it appropriate in the book's short-term model for the author to use the Phillips Curve as an Aggregate Supply curve? Does it capture the working of the labor market as well as an AS curve based, say, on sticky wages? C. Provide an example of the book's short-run model being based on "microfoundations."Place “MON,” “RET,” or “MAIN” beside the statements that most closely reflflect monetarist, rational expectations, or mainstream views, respectively:a. Anticipated changes in aggregate demand affect only the price level; they have no effect on real output.b. Downward wage inflexibility means that declines in aggregate demand can cause long-lasting recession.c. Changes in the money supply M increase PQ; at first only Q rises because nominal wages are fixed, but once workers adapt their expectations to new realities, P rises and Q returns to its former level.d. Fiscal and monetary policies smooth out the business cycle.e. The Fed should increase the money supply at a fixed annual rate.
- a) Consider an AD-AS model with Static Expectations. Show how changes in monetary policy generate short-run movements in output. (b) Consider an AD-AS model with Rational Expectations. Show how changes in the unanticipated component of monetary policy generate short-run movements in output. (c) Explain how overlapping wage contracts generate persistence in output when there are monetary policy shocks.The Russia-Ukraine war triggers a surging of crude oil price to a record high that leads to anegative supply shock of an economy. If the economy is currently at the full-employmentoutput, how does it affect the aggregate price and real output level in the short- and long-runif the central bank does not carry out any stabilization policies? Explain with the aid of anaggregate demand-aggregate supply diagram.In the Friedman-Lucas money surprise model, there is a negative money demand shock. Neither private sector economic agents nor the central bank can observe the shock directly. Assume that the central bank is committed to money growth targeting. 1. How will it affect the labour, goods and money markets? Show graphically. 2. Argue that the shock could result in inefficient outcomes. Explain using diagrams.
- AD-AS vs the classical model and monetary policy. (a) How do the effects of a reduction of the money supply differ in the AD-AS and classical models? (b) How could we determine which of these two models best describes the actual economy? What should we be looking for in the data? (c) Why might the test you proposed in part b not be conclusive?Answer full quation otherwise don't attempt this question (i) Using aggregate supply and demand curves illustrate the different effects on output of demand-pull and cost-push inflation. (ii) Show using an aggregate supply and demand curve diagram, how an initial increase in aggregate demand though monetary policy may have no effect on output if workers with “rational expectations” seek wage rises to compensate for the expected higher price level.Consider the classical AS-AD model with misperceptions. Assume that the economy is initially at its general equilibrium. Now, suppose the central bank considers an increase in the nominal money supply that is not anticipated by households or firms. a. How does the misperception theory work? b. Which of the three markets is first affected (labor, goods, or asset market)? Explain and show graphically how this market is affected by an unanticipated increase in the nominal money supply. c. Use the classical version of the AS-AD model with misperceptions to explain and to show graphically how an unanticipated increase in the nominal money supply affects the short-run equilibrium. d. Use the classical version of the AS-AD model with misperceptions to explain and to show graphically how an unanticipated increase in the nominal money supply affects the long-run (general) equilibrium.
- As monetary policymakers become more concernedwith inflation stabilization, the slope of the aggregatedemand curve becomes flatter. How does the resulting change in the slope of the aggregate demand curvehelp stabilize inflation when the economy is hit with atemporary negative supply shock? How does this affectoutput? Use a graph of aggregate demand and supply todemonstrate.Show using an aggregate supply and demand curve diagram, how an initial increase inaggregate demand though monetary policy may have no effect on output if workers with“rational expectations” seek wage rises to compensate for the expected higher price level.Above is a graphical model of the AS-AD. In this model the initial level of the economy is at the low output and low inflation. Describe what happens to the economy when the Central Bank decides to lower interest rate and most likely this will lead to an increase in money supply thereafter. a. What happens to the aggregate demand? b. What happens to the level of output? c. What happens to the price level? d. Effect of the monetary policy made by the Central Bank?
