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question 2: consider the ad-as model discussed during the…
lectures. assume that the aggregate demand curve is given by
y = 8 - 0.5π, that the long run aggregate supply curve is given
Question: Question 2: Consider The
by yp = 7, that the short run aggregate supply curve is given by
AD-AS
π = π_expectModel Discussed
+ 0.3(y - yp), During
and that the monetary rule isThe
given
by r = 1 + 0.3π. a) what is the economic
Lectures. Assume That The…
Aggregate
Question 2: Demand Curve Is Given
By Y =the
Consider 8 -AD-AS
0.5π, That
model The during
discussed Longthe Run
lectures. AssumeSupply
that the aggregate
Aggregate Curvedemand
Is Given curveBy is
given by Y = 8 - 0.5π, that the long run aggregate
Yp = 7, That The Short Run
supply curve is given by Yp = 7, that the short run
Aggregate
aggregate supplySupply Curve
curve is given Isπ_expect
by π = Given+By
Π = -Π_expect
0.3(Y Yp), and that the + monetary
0.3(Y -rule Yp), AndbyThat
is given r=1
+ 0.3π.
The Monetary Rule Is Given By R = 1
+ 1.0.3π.
a) WhatA)isWhat Is The
the economic Economic
interpretation behind the
aggregate demand curve? Why is it negatively
sloped? If you consider point A=(π,Y)=(3, 6.5) and
point B=(π,Y)=(5, 5.5), is monetary policy more
expansionary in point A, in point B, or neither?
Are you referring to the exogenous or to the
endogenous stance of monetary policy?
(5 marks)
2. b) Suppose the economy is in equilibrium at the
potential level of output, with in%ation
expectations equal to actual in%ation, which
equals 2%. A &nancial crisis hits the economy. Use
the model to interpret what happens in the short
run and in the long run if the central bank does
not intervene exogenously with an expansionary
monetary policy.
(8 marks)
3. c) According to the AD-AS model, what is more
challenging for a central bank: to use active
exogenous monetary policy to o(set a &nancial
shock, or to use active exogenous monetary
policy to o(set an exogenous increase in prices
due to an oil price shock? Use the model to
discuss each case separately. Can the central
bank avoid a drop in output and a variation in the
price level?

(12 marks)

Expert Answer 100%

Answer: a.) The economics following the AD curve is

that describes the total price or in%ation level of an
economy with the total demand for products of a
nation. It slopes negatively because of the money e(ect
when price rises then the purchasing…
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