This question uses the Macroeconomic Simulator available from the Carlin and Soskice website http://www.oup.com/uk/orc/carlin soskice to model a negative temporary aggregate demand shock. Start by opening the simulator and choosing the closed economy version. Then reset all shocks by clicking the appropriate button on the left hand side of the main page. Use the simulator and the content of this chapter to work through the following:

(a) Apply a temporary \(5 \%\) negative demand shock. Save your data.

(b) Use the impulse response functions from the simulator to help explain the path of the economy following the shock.

(c) Draw the IS - PC - MR diagrams for this scenario.

(d) Adjust the central bank preferences (i.e. \(\beta\) ) to 0.5 and save your data. Now, adjust the central bank preferences to 1.5 and save your data again.

(e) How has varying \(\beta\) affected the impulse response functions? Relate this to the effect that changing \(\beta\) has on the MR curve.