Problem Set 6: The ASAD Model - Part 2 Economics 320L April 22, 2021 Administrative Details: Please submit your problem set by May 6th on Canvas. For this sixth problem set, please work on your own, that is, you cannot work in groups when developing the solutions. If you have questions regarding these problems, please contact the teaching assistants. Problems 1. Suppose that changm in technology A are not permanent. In other words, when A goes up, it stays high in the short run, but goes back to its original level in the long-run. Do the comparative static exercise for a temporary change in A and discuss how the effects on the economy di'er from those when changes in A are permanent. . Suppose that most of the uctuations in real GDP that we observe in the real world are due to changes in consumer sentiment. Can scal policy he used to stabilize real GDP and prices? Can monetary policy be used to stabilize real GDP and prices? . Now suppose that when monetary policy is used, it a'ects the economy only after a long delay. Discuss the implications of this in relation to what you argued in question 2 about whether monetary policy can be used to stabilize real GDP and prices. . Suppose that most of the uctuations in real GDP that we observe in the real world are due to temporary changes in productivity (A). Can scal policy he used to stabilize real GDP and prices? Can monetary policy be used to stabilise real GDP and prices? . Suppose that the central bank targets a specic interest rate r'. This means that the central bank automatically adjusts the money supply to ensure that r = r' at all times. Now do the comparative static exercise in response to an increase in money technology, when the central bank is dedicated to a target interest rate. Does this policy of targeting the interest rate appear to stabilize or destabilize output? Do the same exercise for an increase in animal spirits. . Self-fullling Prophecies 1: Suppose that emyone all of a sudden expects prices to rise, so P" goes up. Show what happens in the short-run after such an increase in expectations of future prices. In particular, do prices and up rising or falling? Self-fullling Prophecies 2: Suppose that consumers become more pessimistic about future incomes (C S ] and rms become more pessimistic about future prots (SP). Consider the response of the economy to this dual shock in the shorbnm. How did this increased general pessimism affect the economy and people's incomes? . Read the article \"How Coronavirus almost brought down the Global Financial System" available here: https: f fwwwtheguardian.com/husincm/202i][apt/14/how-coronavirus-almost-hrought-downtheglobal nancial-system. Discuss the actions of scal and monetary policy during the current pandemic. Pay particular attention to central banks' role of the \"lender of Last Resort". What are the scal impli- cations of this role
