I need help with the last two questions in the end of the document.

I need to find out the formula only will solve myself. I need explanation of how to input the numbers in the formula. Please help

Overview of last week For next Tuesday we will apply model to Great Recession (Chapter 14) and discuss posted Blinder article on current state of the economy. For next Thursday we will continue to discuss current economy and link it the discussion to long-run economic prospects that we covered in the first part of the course. Please read two other WSJ articles on labor market by Greg Ip. The second half of Thursday's class will be a final exam review. I will also post a practice exam. The final exam will be about a 90 minute exam during the scheduled final exam period Monday June 8 12 - 3. TWO Remaining assignments The third of 4 non-lecture assignments (video quiz) is due Friday May 29th at 10 PM. Be sure to complete this! There will be no extensions! The fourth of 4 non-lecture assignments will be posted this Friday or Saturday at the latest and will be due Sunday June 7th at 10 PM. It is based on the latest quarterly GDP data. Each of these assignments is worth 3 points so do not neglect them! Lecture 16 Part 1 The AD-AS model Key features of the macroeconomy and their patterns Building AD from IS curve by adding MPR Evaluating the impact of shocks both graphically and algebraically Inflation in percent Inflation Output in percent 1960 2 Negative 1 1961 1 Negative 2 1963 1 Negative 1 1964 1 1965 1 3 1966 2 5 1967 3 3 1968 4 4 1969 5 3 1970 6 0 1971 4 0 1972 3 2 1973 6 4 1974 11 0 1975 9 Negative 4 1976 6 Negative 2 1977 7 Negative 1 1978 7 0 1979 12 0 1980 14 Negative 2 1981 10 Negative 2 1982 6 Negative 6 1983 3 Negative 5 Inflation in percent Inflation Output in percent 1983 3 Negative 5 1984 4 Negative 1 1985 3 0 1986 2 0 1987 3 0 1988 4 1 1989 5 1 1990 5 0 1991 4 Negative 3 1992 3 Negative 2 1993 3 Negative 2 1994 3 Negative 2 1995 3 Negative 2 1996 3 Negative 1 1997 2 Negative 1 1998 2 0 1999 2 2 2000 3 2 2001 3 Negative 1 2002 2 Negative 2 2003 2 Negative 3 2004 2 Negative 1 2005 3 0 2006 3 0 2007 3 Negative 1 2008 4 Negative 3 2009 0 Negative 7 2010 2 Negative 5 2011 3 Negative 5 2012 2 Negative 4 2013 3 Negative 4 2014 2 Negative 3 2015 0 Negative 2 Target inflation AD curve combines IS curve with Monetary Policy Rule, MPR IS Curve MPR At time t, what are the two endogenous variables in these two equations? Three distinct inflation variables Actual inflation, endogenous Expected inflation, exogenous (at time t) Target inflation, exogenous, set by central bank Steady-state We are at a steady-state in the sense that t = t-1 = the central bank's target inflation, so there are no forces causing the economy to move. If differed from 0, Also since = 0, output is at potential output . inflation would differ from past inflation so we could not be at a steady-state. If current inflation differed from past inflation, in the next period the economy would adjust to the higher or lower inflation, reflected in a shifting AS curve. Target inflation Model algorithm with adaptive expectations Time 0: steady state where short run output is 0 (actual = potential output), expected inflation = target inflation. Time 1: Shock (or policy change) - solve for short-run output and inflation in time 1, assuming expected inflation still = target inflation. All other endogenous variables (R and expenditures) solved from these values and should be mutually consistent. Time 2: Adjustment to shock (shock may or may not persist) - solve for short-run output and inflation using time 1 value of inflation for expected inflation. AS shifts as expected inflation adjusts to past inflation. Time 3: Repeat time 2 based on updated information. And so forth... Negative Demand Shock We will work through a problem similar to the one on the review questions to show the impact of a negative aggregate demand shock. We will use the graph and algebra to trace through the dynamic impact of the shock Today's lecture quiz questions are based on completing and understanding this problem. Demand Side = 0.6 = 0.2 = 0.2 2 0.04 : 0.04 = 2( .02) = 10 AD and AS Curves AD: = 4( 0.02) where = .6 + .2 + .2 1 = 0 AS: = 0.02 + 0.5 A 2%=Target inflation The shock = . 2 0.04 Since = 4( 0.02) where now = .6 + .14 + .2 1 = 0.06 So now = 0.06 4 0.02 = 0.02 4 Lecture 15 Part 2 The AD-AS model Algebraic solution to key endogenous variables Solving the rest of the endogenous variables to check if the puzzle fits together. A Target inflation B The new equilibrium in Time 1 (B) AD: = 0.02 4 AS: = 0.02 + 0.5 Solution: = 0.02 4 (0.02 + 0.5) 3 = 0.06 = .02 or -2% = 0.02 + 0.5 0.02 = 0.01 1% A Target inflation B C Eq. C assumes AD shock still \"in force\" The new equilibrium Time 2 (C) = 0.02 4 = . + 0.5 = 0.02 4 0.01 + 0.5 = 0.02 2 3 = 0.02 so = 0.0067 or -0.67% = 0.01 + 0.5 .0067 = 0.0067 or 0.67% A Target inflation B C D Why is spending rising as the economy moves from B to C to D? Monetary Policy Rule in action (in %): % 4 = 2(% 2) Time % R% 1 (A) 2 (B) 3 (C) 2 1 0.67 4 2 1.34 i% (ex post) 6 3 2 Ex post i is the nominal interest rate based on actual inflation. Quiz Questions Given the value of R, find C, I and G in period 1 (B) to show that they confirm output is 2 % below potential output of 10. (R in % other values in $ trillion) Suppose the AD shock lasts only 1 period. Find shortrun output and inflation in period 2 (C) in this case. Round off to 1 decimal as %. A Target inflation C B