Suppose an economy begins at ADD and A80 in long-run equilibrium with real GDP equal to Y*; the price level is stable at P0. a. Suppose the central bank announces that it will implement an expansionary monetary policy that will shift the AD curve up by 5 percent. Does the shift of the AS curve following this announcement depends on whether workers and rms believe the central bank's announcement? Explain. O A. Yes. Workers' and rms' expectations of real interest rates put pressure on the price level, which is what causes the AS curve to shift. Workers' and rms' expectations of ination will not change if they do not believe the announcement. O B. Yes. Workers' and rms' expectations of ination put pressure on nominal wages, which is what causes the AS curve to shift. Workers' and rms' expectations of ination will not change if they do not believe the announcement. O C. No. The bank's announcement will affect the shift of the AS curve, regardless of whether workers and rms believe it. 0 D. No. The bank's announcement will not affect the shift of the AS curve, regardless of whether workers and rms believe it. b. Assume that people trust the central bank's announcement that it will implement an expansionary monetary policy that will shift the AD curve up by 5 percent. Show the likely effect of this announcement on the AS curve. Price Level '0 0 Diagram 1 Ya: Real GDP b. Assume that people trust the central bank's announcement that it will implement an expansionary monetary policy that will shift the AD curve up by 5 percent. Show the likely effect of this announcement on the AS curve. Diagram 1 Using the three-point curve drawing tool, show the likely effect of this announcement on the AS curve in Diagram 1. Label Y* this curve AS1. Carefully follow the instructions above, and only draw the required objects. c. In Diagram 2, show how a sustained and constant inflation of 5 percent is represented (with Y = Y*). 1.) Using the three-point curve drawing tool, show the positions of the AD and AS curves in two subsequent periods. Label the curves in the first period AD, and AS, and label the curves in the second period AD2 and AS2. ASO Price Level 2.) Using the point drawing tool, show the equilibrium in each period. Label the new equilibrium in the first period E, and label the new equilibrium in the second period E2. LEO Carefully follow the instructions above, and only draw the required objects. ADO d. In the absence of any supply shocks, explain why a constant inflation is only possible when real GDP is equal to Y". Real GDP if an inflationary gap exists with monetary validation, then persistent inflation caused by the inflationary gap will cause , which will lead to a cycle in which actual inflation and continue toCarefully follow the instructions above, and only draw the required objects. Diagram 1 c. In Diagram 2, show how a sustained and constant inflation of 5 percent is represented (with Y = Y*). Y* 1.) Using the three-point curve drawing tool, show the positions of the AD and AS curves in two subsequent periods. Label the curves in the first period AD, and AS, and label the curves in the second period AD2 and AS2. 2.) Using the point drawing tool, show the equilibrium in each period. Label the new equilibrium in the first period E, and label the new equilibrium in the second period E2. Price Level ASO Carefully follow the instructions above, and only draw the required objects. d. In the absence of any supply shocks, explain why a constant inflation is only possible when real GDP is equal to Y". If an inflationary gap exists with monetary validation, then persistent inflation caused by the inflationary gap will cause which will lead to a cycle in which actual inflation and continue to ADO . If an inflationary gap exists without monetary validation, then the pressure of excess causes nominal wages to which shifts the curve the gap and resulting in Real GDP
