For this question, assume the following cconomy: C=400+0.5(YT)I=200+0.4Y2000(r+x)G=500T=500e==0.02x=0.01 And the central bank sets i=0.07. a) Find Y in equilibrium (this is when IS=LM). We will assume this is the potential output of this economy. b) Let's also suppose the previous equilibrium represent the pre-Ukraine invasion economy. Now, with the war in Ukraine, individuals and businesses become very nervous about the future. This is represented by an increase/decrease (you need to pick the right one) in c0 and b0 by a cumulative total of 140 . Find the new equilibrium. Show the original equilibrium and the new one on a graph. Make sure to label both axis and the IS-LM curves. Explain the mechanisms that explain the transition to the new equilibrium. c) If the central bank wants to intervene to offset the change in behaviours by individuals and businesses, by how much does it needs to change the real interest rate to keep the economy at, its potential output? Discuss this result. d) Instead of an central bank intervention, suppose the government increases spending. By how much does the government needs to increase G to bring back the economy to its potential output? e) Now let's add the Phillips curve to our model. Let's say it is given by the following equation: =25,0001(YYn) Graph the IS/LM/PC equilibrium from part c) and d). Show and explain why the central bank had to intervene. Make sure to add the Phillips curve graph under the IS/LM graph. f) Now assume the war in Ukraine impacts the price of gas for a long time (i.e. we will consider this a permanent shock). This changes the Phillips curve to: =25,0001(YYn)=0.04 i. Find Yn. Note that initially, the economy is at the old potential output (Yn). ii. Let's assume the government does nothing. What will the central bank do? Explain why. iii. Show what happened graphically. iv. Is this situation similar to what's happening in Canada and the world right now? For this question, assume the following cconomy: C=400+0.5(YT)I=200+0.4Y2000(r+x)G=500T=500e==0.02x=0.01 And the central bank sets i=0.07. a) Find Y in equilibrium (this is when IS=LM). We will assume this is the potential output of this economy. b) Let's also suppose the previous equilibrium represent the pre-Ukraine invasion economy. Now, with the war in Ukraine, individuals and businesses become very nervous about the future. This is represented by an increase/decrease (you need to pick the right one) in c0 and b0 by a cumulative total of 140 . Find the new equilibrium. Show the original equilibrium and the new one on a graph. Make sure to label both axis and the IS-LM curves. Explain the mechanisms that explain the transition to the new equilibrium. c) If the central bank wants to intervene to offset the change in behaviours by individuals and businesses, by how much does it needs to change the real interest rate to keep the economy at, its potential output? Discuss this result. d) Instead of an central bank intervention, suppose the government increases spending. By how much does the government needs to increase G to bring back the economy to its potential output? e) Now let's add the Phillips curve to our model. Let's say it is given by the following equation: =25,0001(YYn) Graph the IS/LM/PC equilibrium from part c) and d). Show and explain why the central bank had to intervene. Make sure to add the Phillips curve graph under the IS/LM graph. f) Now assume the war in Ukraine impacts the price of gas for a long time (i.e. we will consider this a permanent shock). This changes the Phillips curve to: =25,0001(YYn)=0.04 i. Find Yn. Note that initially, the economy is at the old potential output (Yn). ii. Let's assume the government does nothing. What will the central bank do? Explain why. iii. Show what happened graphically. iv. Is this situation similar to what's happening in Canada and the world right now
