Basic information: The economy of Colombia is characterized by the following relations. An IS Curve Yt = a - b(Rt - T) A Fisher equation: Rt = it + ft - Ett+1 A monetary policy rule: it = r + m(t - 7) + Ett+1 A Phillips curve: It = Et-17it + uyt An assumption for inflation expectations: Pt-17t = Tit-1 Where ft is a shock to interest rate spreads. f takes positive values when banks are having financial distress in their balance sheets. Research economists at the central bank of Colombia have determined that 7 = 3%, T = 2%, v = 1,b = 1, m = 2, where the notation is the same as in class. After being in the long-run equilibrium, in the year 2025, the economy of Colombia did not experience any changes to a, or to the parameters of the model, but the banks of Colombia face financial trouble, so f2025 = 0.01. What is the equilibrium level of inflation in Colombia in 2025? O 4% O 2.33%After being in the long-run equilibrium, in the year 2025, the economy of Colombia did not experience any changes to a, or to the parameters of the model, but the banks of Colombia face financial trouble, so fogo5 = 0.01. What is the equilibrium level of inflation in Colombia in 20257 O 4% O 233% O 2% O 3.5% O 3.75% O 2.75% O 2.25% O 2.5% O 3% O 3.66% O 2.66% O 3.33% O 3.25% Imagine two economies. In Economy A, the central bank responds more to changes in inflation when setting interest rates than the central bank in Economy B. Thatis, m 4 > mp, where m 4, mp are the parameters of the monetary policy rule of country A and country B, respectively. Imagine the government in both countries increase its expenditures by 1% of potential GDP, S0 Gy = 0.01 in both countries. Both countries have upward-sloping aggregate supply curves and downward-sloping aggregate demand curves. According to our AS-AD model, which country will experience more crowding out of investment? O Country A O Same crowding out O It is impossible to determine O Country B When the Zero Lower Bound (ZLB) is active, the Aggregate Demand (AD) curve becomes vertical. Choose the right reason for the AD curve to be vertical at the ZLB (O At the ZLB, inflation does not react to changes in short-run output O At the ZLB, negative shocks to the economy are more likely to occur. (O At the ZLB, government expenditures are more powerful. (O At the ZLB, the central bank cannot reduce its interest rates even though inflation is below target The degree of crowding out depends exclusively on the shape of the Aggregate Demand curve since the Aggregate Demand curve captures the direct effects of government expenditures and the indirect effects on investment of an increase in the real interest rate. O True O False The economy of Germany is characterized by the following relations. AnlSCurveY; = a b(R; 7) A Fisher equation: Ry = 4; + f; Eymiq A monetary policy rule: y = T + x + m(m T) + Eymaq A Zero Lower Bound constraint: 3; > 0 A Phillips curve: m; = Ey_1m; + vY; Where f; is a shock to interest rate spreads. f; takes positive values when banks are having financial distress in their balance sheets, and is a monetary policy shock. The economy of Germany suffers a financial shock, so f; = 0.01. One journalist writes in the newspaper that by setting x; = 0.01, the central bank can ensure the economy will have short-run output equal to zero and inflation equal to the inflation target. Which of the following statements is correct? (O The journalist is incorrect regardless of any other detail 0O P The journalist is correct The journalist is correct in the case in which b = m L A The journalist is correct only in the case in which the Aggregate Supply curve is flat O O The journalist is correct only in the case in which the ZLB is not binding () The journalist is correct only if the economy is at the ZLB () The journalist is correct only in the case where inflation expectations are adaptive () The journalist is correct in the case where the Aggregate Supply curve is vertical