Id like a help with the checklist questions of chapter 3. Macroeconomics Carlin Soskice. EC450

Ill past here:

1. Why is monetary policy chosen overfiscal policy as the preferred tool for stabilization policy?

What does the government gain from controlling monetary policy? Why would they choose

to delegate responsibility for monetary policy to an independent central bank?

.3 What are the advantages and disadvantages Of a target inflation rate of 4% as compared with

one of 0% per annum?

.4 Explain what is meant by the central bank's loss function. How are the central bank's preferences

reflected in the loss function? Draw the loss 'circles' for the cases where

(a)fi=1;

(b)/3<1;

(C) ,B>'l.

In which of the three cases will the central bank reduce inflation back to target quickest after

an inflation shock? Is there any downside to adopting this policy stance?

.5 Assume that a = ,3 = 1, derive the MR curve graphically using the tangencies between the

loss circles and the Phillips curves. With reference to the diagrams, explain the effect of the

following (in each case, assume all other parameters are held constant):

(a) An increase in the slope of the Phillips curve, a

(b) An increase in central bank's inflation aversion, fl.

. 7Following an inflation shock, explain why unemployment goes up before the economy returns

to mediumrun equilibrium.

.8 Draw the 3-equation model and give a detailed period by period description ofthe adjustment

process for the case where the economy is hit by a permanent negative aggregate demand

shock.

. 9With reference to the scenario in Question 7, explain the behaviour of the central bank and

the economy in a situation where there is no lag in the IS curve.

. 10Draw the impulse response functions for output, inflation and the real interest rate afterapermanent

positive aggregate demand shock and a permanent positive supply shock. [Hintt the

3-equation model diagrams for these two cases are shown in Figs. 3.11 and 3.14 respectively]

Use the 3-equation model diagrams to show how the economy can fall into a deflation trap.

Explain, with reference to the diagram, how the central bank/government can intervene to

escape the trap. Show the relevant IS curve and re-label the MR as the PR to indicate that

fiscal policy is being used, Are there any reasons why these policies might not work