08 Jun Question ECN137 Macroeconomic Policy
Question
ECN137 Macroeconomic Policy
Post-class Assignment #3 (Due: Sept. 8, 2015)
Jae Wook Jung
[email protected]
1. Consider the following AS-AD short-run framework. Assume that up to period t = 2000
the economy has been resting at the long-run equilibrium (Point A). The Fed. decides an
expansionary policy with shifting AD curve to the right (AD2000 =⇒ AD2001 ).
inflation π
6
Z
Z
Z Z
Z AD2001
Z
Z Z
Z Z
AD2000 Z AS2000
Z
ZZ
s
A ZZZZ
Z Z
Z Z
Z Z
Z
Z
π
¯
– output gap Y = Y − Y
˜t
¯
t
0
a) Consider the traditional short run model (i.e., without rational expectations). What is
the outcome of the expansionary policy? Label the point.
b) Consider the new Classical model that assumes rational expectations and flexible prices.
What is the outcome if the Fed’s policy is completely anticipated by people? Draw new
curve if necessary. Label the point.
c) Now consider New Keynesian model that assumes rational expectations and sticky
prices. What is the outcome if the Fed’s policy is completely anticipated by people?
Draw new curve if necessary. Label the point. You may want to draw the curve on the
same plot for b).
2. Consider the following balance sheet of the First New Bank.
Table 1: Consolidated Balance Sheet for the First New Bank
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