University : Macquarie University UniLearnO is not sponsored or endorsed by this college or university.
Subject Code : ECON3011
Country : Australia
Assignment Task :

Question 1

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(a) Derive the AD curve in the case when the central bank uses the above rule (*). (Please show steps in your derivation). Re-write the AS curve using the formula for inflation expectations. Make sure you write down the AD and AS with the parameter values substituted.

(b) Assuming that in period 1 the economy is hit by the demand shock a? = −1 lasting for two periods. Find the values of inflation, short-run output and the ex-post real interest rate in periods 1, 2 and 3. Explain how the economy will adjust to its long-run equilibrium starting from period 3. Accompany you answer with a well-labelled graph.

 

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