macroeconomics
thankyou for your help
1. (lSMPAS with a temporary demand shock) Suppose that there is a tem porary consumption boom that lasts for one period. (3) IS: 17t=aI3(RtF) AS: Am=m7t+5 Using the lSMPAS framework, explain what happens to the econ omy in the absence of any monetary policy action (keeps the REAL interest rate unchanged). (i) At time 1, what would be the effect of the shock on the lSMP AS curve? Be sure to include graphs showing how real interest rate, output and ination respond to the shock, and explain. (ii) At time 2, what would be the effect of the shock on the lSMP AS curve? Be sure to include graphs showing how real interest rate, output and ination respond to the shock, and explain. (iii) Using your answers in a(i) and (ii), plot how real interest rate, output and ination will evolve over time (Xaxis: time, Yaxis: real interest rate, output, ination). Suppose you are in charge of the central bank. (i) What monetary policy action would you take? What the shortrun output will you choose and why? Using the lSMPAS framework, explain what would happen to the economy in this case at time 1. Be sure to include graphs showing how real interest rate, output and ination respond to the shock, and explain. (ii) What would happen to the economy in this case at time 2? Be sure to include graphs showing how real interest rate, output and ination respond to the shock, and explain. (iii) Using your answers in b(i) and (ii), plot how real interest rate, output and ination will evolve over time (Xaxis: time, Yaxis: real interest rate, output, ination). Also, compare your graphs of output and ination with those from part (a). 2. (lSMPAS with an oil price shock) Suppose the economy is hit by an unexpected oil price shock that permanently raises oil prices by $50 per barrel. This is a TEMPORARY increase in 5 in the model: the shock 5 becomes positive for one period and then goes back to zero. (3) IS: Yt=aI3(RtF) AS: Am = Wt + 5 Using the lSMPAS framework, explain what happens to the econ omy in the absence of any monetary policy action (keeps the REAL interest rate unchanged). What would be the effect of the shock on the AS curve? Be sure to include graphs showing how real interest rate, output and ination respond over time. (i) At time 1, what would be the eect of the shock on the lSMP AS curve? Be sure to include graphs showing how real interest rate, output and ination respond to the shock, and explain. (ii) At time 2, what would be the eect of the shock on the lSMP AS curve? Be sure to include graphs showing how real interest rate, output and ination respond to the shock, and explain. (iii) Using your answers in a(i) and (ii), plot how real interest rate, output and ination will evolve over time (Xaxis: time, Yaxis: real interest rate, output, ination). Suppose you are in charge of the central bank. (i) At time 1, what would be the eect of the shock on the lSMPAS curve? Be sure to include graphs showing how real interest rate, output and ination respond to the shock, and explain. (ii) At time 2, what would be the eect of the shock on the lSMP AS curve? Be sure to include graphs showing how real interest rate, output and ination respond to the shock, and explain. (iii) Using your answers in a(i) and (ii), plot how real interest rate, output and ination will evolve over time (Xaxis: time, Yaxis: real interest rate, output, ination)
