Monetary Policy: End of Chapter Problem We discussed how hard it is to keep AD stable or put it back "where it belongs" after a shock. Sometimes it is better taking two years to slowly and carefully undo an AD shock rather than shift it back quickly in one year. To illustrate, let's see how things turn out if you take two years rather than one year to react to a negative velocity shock. In this question, your ultimate goal is to get AD back to 5% per year. The potential growth rate is 3% and expected inflation is always 2% per year. Starting point: AD: 1% Inflation + Real Growth Rate SRAS: Inflation Expected Inflation + (Real Growth Rate - Potential Growth Rate) a. Slow approach: Add 2% per year to AD for two years (through some mix of money growth and higher confidence). What will real growth equal each year? Real growth rate at the end of year one: Real growth rate at the start: Real growth rate at the end of year two:

Monetary Policy: End of Chapter Problem We discussed how hard it is to keep AD stable or put it back "where it belongs" after a shock. Sometimes it is better taking two years to slowly and carefully undo an AD shock rather than shift it back quickly in one year. To illustrate, let's see how things turn out if you take two years rather than one year to react to a negative velocity shock. In this question, your ultimate goal is to get AD back to 5% per year. The potential growth rate is 3% and expected inflation is always 2% per year. Starting point: AD: 1% Inflation + Real Growth Rate SRAS: Inflation Expected Inflation + (Real Growth Rate - Potential Growth Rate) a. Slow approach: Add 2% per year to AD for two years (through some mix of money growth and higher confidence). What will real growth equal each year? Real growth rate at the end of year one: Real growth rate at the start: Real growth rate at the end of year two:

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter27: Issues In Macroeconomic Theory And Policy

Section: Chapter Questions

Problem 4P

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