the-economy-begins-in-long-run-equilibrium-then-one-day-the-president-appoints-a-new-chair-of-the-fe

Question

The economy begins in long-run equilibrium. Then one day, the president appoints a new chair of the
Federal Reserve. This new chairman is well known for her view that inflation is not a major problem for an economy.
a. How would this news affect the price level that people would expect to prevail?
b. How would this change in the expected price level affect the nominal wage that workers and firms agree to in their new labor contracts?
c. How would this change in the nominal wage affect the profitability of producing goods and
services at any given price level?
d. How does this change in profitability affect the short-run aggregate-supply curve?
e. If aggregate demand is held constant, how does this shift in the aggregate-supply curve affect the
price level and the quantity of output produced?
f. Do you think this Fed chairman was a good appointment?

Yi Chun Lin · Accepted Answer

of a question seven. The economy begins in law Nikolay print as the graph shown here and then one day the president appoints a new chair of the Federal Reserve. This new Sherman is well known for her beauty that inflation is not a major problem. No question a how would this news affect the price level that people would expect to prevail So things that now we know that the head off the Federal Reserve&#x27;s things that inflation is not a problem. So she you&#x27;re not put much effort into controlling injury inflation. So we are expecting Ah rice in price like also were expecting to have a raised in Christ, I&#x27;m sorry. I forgot Thio a label that why actually this price and expects is as quantity of output away. So we now have a SRI question. A People are expecting the price level to write. So question be, how would this change in this change in the expected press level, which is how would this Ah, this expectation is going to change phenomena waged at workers in firms agreed to in their new labor contracts. So scenes we know that prices rising waters will ask for more compensation. Bryson. They need a higher wage in order to maintain their old living standard. So we know that the nominal wage Sorry, Common. Brad, we know that call the, uh, nominal wage is going to rights. So for my osha agree to this, um, this proposition questions see, how would this change? A nominal wage, which is the rise in the number of which attractive profitability of producing goods and service is at any given presentable, so off course, at any given price level. If the firm has to pay each worker Ah, higher profit. Those are the higher wage. Their profit is off course going to decrease right. He is their costs off. Labor is rising, so they have, ah, lower profit. So this lower profit is going, thio, decrease their output. So that is what question D is asking. Pushing day is asking How does this changing profitability, which is a decreasing profits, the fact the short run agree supply. So due to this, the short run aggregate supply is going to shift to the left because the firm now know that Oh, we cannot hire that much worker because they&#x27;re so expensive. So we have to produce less. So then our aggregate supply curve shifts to the left. And then question E if a creative man is held constant, which means that this hour soaping Kurt doesn&#x27;t change. How does this ship in agri supply curve Effective press level and a quantity of output Output producer, We know that noone to liberal is here and ah, the old equilibrium is here. We know that the price level rises and the quantity decrease, so raise prices in the quantity of out with decrease. So finally, we can answer questions back. Do you think this Fed chairmen wasa good appointment? Um, well, just if we just judge this man also this lady on the surface, and we should answer No, it is not a good appointment because because off where, um because of her policy of not holding inflation constant people are expecting a rice in the price level. So a rising a wage So the firm is not going to afford that much expensive workers, so they&#x27;re going to cut down their produce. So this new assignment is actually going to make the economy for into a, uh, inflation trap, and then they are producing fewer outputs, which is not good overall,

Yi Chun Lin · Answer

Okay, question three A&#x27;s there long. So we just deal with its That my step question A used the model off creating man and agree supply to illustrate initially lingering off this long run equilibrium in the market. So we just drove this short run aggregate supply curve is Ah, Barstow Ping. And, uh, aggregate demand curve is down. We&#x27;re sloping. And we know that the long run agrees of my always verticals are destroyed. Vertical. I&#x27;m sorry. Vertical. Why here? Which crosses the intersection off these two wines. So this is a long run Agra G supply. So we always have to have this graphing mind. And at why accesses p price level access is cute, which is the output off quantity of the quantity outward. All right, so, uh, we call the initial equally grim point A So now we can move on to ends. Real question Be Question Bay is saying that the central bank raises the money supply by 5% so we know that, like the central bank is giving out money to everyone because we have more money supply. Right? So now everyone in economies feeling like feeling Richard and before so they might take their extra money to go shopping or to go like go on a vacation. So we have this short one aggregating manager shift to the right so they&#x27;re short run new equilibrium. He&#x27;s going to be this dot Call this. Be okay. Question C now showed a new law Nicole Graham called C. So in the long run, what would happen? First of all, from point A to point B, what we have is a rice off price level. So everyone also everything in the market is getting more and more expensive and English order on the output off. The quantity off outward is increasing as well. But in the long run seems everything is more expensive. Workers themselves. Well, um, asked for a higher wage so that they cannot maintain Nero living standard. Right? So they were goes to the company and asked their boss had paid and more so from the standpoint off firm owner, they think that it is costly to hire that much workers right now, so they will, like, just fire some of them. So if their fire workers, they can produce fewer goods. So the aggregate supply curve is going to shifts to DeLaet. That is because the wage also wage goes up as the price like goes up. Okay, so firms can now cannot produce as many goods as it used to be. So this is point C. Okay, so now we have points A and B and C. So now we can answer questions because of these. In that according to the sticky wage theory of reverie supply, how do nominal wages is 0.8 compared to nominal wages at point B? So sticking wage the re stressing that in the short run the wage is sticky, it is difficult, or I&#x27;m not a very profitable Fordham manager off the firm to change their workers. Witch. So, Mom, in a wager, 0.8 workers and point B workers are actually the same. But what about point seat workers and 0.0.8 workers? Now, we&#x27;re talking about Nam in a week, so nominal wages like, um positively correlated with the price level. So things we know that aim point. See, we have a higher price level. Workers well ask for a higher weight, right? So the nominal wage in the appoint sees higher damn point. But what we really care about is the rial term in this economy. That is what the question is asking. The question is asking us to compare the real wages up these three points. So how do we compare Rhea wages? We actually just We can just simply look at the vertical line, which is the moment on aggregate supply. So these three dots, the long run accurate a supply for A and C are the same. So I was just ready here. So the rial Ah, wages are related to the room, Laura. Integrity supply. So actually, the real wage of Point A and C are the same while the real wage off. Um, point B, he&#x27;s the leader bit hired. Then point a and point, See? Because that would be We have the largest s. So sorry. We have the biggest one run at the biggest, um, aggregate supply and demand in your group, but it will go back to the original level. Harrison. Okay, so question F is like a summary off this question. So, judging by the impact of money supply, a nominal and religious, is this analysis consistent with the proposition that money has Rio effects in the short run, but is neutral in their long run. So the Inger is? Yes, because we know that they would take a look at the real wage in the short run, which is the B, which is the point B. We have right here. So you call a red. We know not in the short run. Everyone is, like, actually doing better because they have a higher wage. They produce that they want to buy more things, and they can really buy more things. But in one run, they will go back to the equilibrium and go to the same level right here. We&#x27;re a point A and C lies on this, um, vertical line. So this is why I like, in the short run this policy, this monetary policy, a printing out money, uh, increasing the money supply is going to work is that there is, like, a small change off the real wage, like in short run. But then in the long run, this effect is not working And that we have this new trilogy in money

Alex Loukas · Answer

in question aid, Western Aid says, as described in the chapter, the Federal Reserve in 2008 phase that decrease in great demand caused by the housing and financial crises and a decrease in short run Hagrid supply caused by rising commodity prices. Party asks starting from it longer An equilibrium illustrate the effects of these two changes, using both an average supply agree demand diagram and a Phillips Curve diagram on both diagrams labeled Initialed longer in a polygamous point day. And there is a resulting short lapse sort. Veronica Liberal this point beat for each of the following variable state, whether it dries are false or whether the impact is ambiguous output, Employment price. Live on inflation. All right, so here of dawn, two graphs and I stayed there two possibilities. I explain what this means in a while, but let&#x27;s take a look at the first crap on the top. Left Standard standard aggresive migrated monograph as always, it longer and I grew. Supply curve will be vertical interested. It will intersect the X axis at the natural level found with y one and the economy&#x27;s at the Point A, which is the intersection of 81 S R A s one. So point it is ah longer in the live room. And we know that the economy is facing a very negative shock and agri demand. So the A D curved ships from 81 82 right here, chips to the left. And on the other hand, we also have ah, negative agreed supply shuck from rising commodity prices. So the shore drive degrees of lacquered ships also ships to the left from S R. A s one s R A s suit right here. So the resulting, um, recessionary equilibrium will be a point B, which is the intersection of 82. When s sorry is too. And this will result result unambiguously, uh, lower level out. But why, too? So the difference between y one y two is a recession ago. So here in the first draft, we can see that the, uh, um price level will drop from p one to pee, too. However, if we take a look at the diagram, it the bottom. I&#x27;ve drawn exactly same diagram, but with it with some with a little change. The every demand curve shifts less, um, as compared to the shoulder anger supply curve and the new equilibrium results again. Lower level but results in the higher price level. P, too, so we can say that came back from the price level. Some Vegas, because it depends on the magnitude of the change of the agreed amount, agreed. Supply curve. So if the aggregate men shock is more first, the price level will drop. If the accurate supply curve is more first, the price will rise because companies will adjust their protection plans accordingly to reflect there&#x27;s supply shop. So just for the sake of exposition, gonna assume that the price level will rise because this is easier to illustrate the Phillips Curve diagram, which I have drawn here on the right. As always, the longer and Philip&#x27;s curve intersects the X axis at the natural level. Felt what you want. The economy is initially a coin A, which is the intersection of the Longer and Philip&#x27;s curve with the short run Phillips curve right point A is the long run equilibrium resulting in inflation rate of Hae won. Uh, and now, first of all, the grain supply shock negative aggregate supply shop will shift the short run Phillips curve higher. So the economy and the policy there&#x27;s air facing, uh, it less favorable, favorable trade off between inflation and prices prices meaning that for each level of unemployment, the prices will be higher or for each inflation, so the unemployment rate will be higher. And since we assumed that the price level will rise in the comet&#x27;s going from point A to point B right here first the Philips air shifts and then the economy because of the anger demand shock moves along the Phillips curve to the right. So as you can see, that lower level found the course wants to a higher unemployment rates. And the increase in the price level also corresponds to an increase in the inflation rate. Okay, In part b, suppose the Fed response quickly to these shocks in adjust monetary policy to keep unemployment and output at their natural levels. What action would it take on the same set of graphs and for today&#x27;s show, the results in labeling you actually room s point c? All right. So as far as the agreed Amanda Gris a flicker is, ah is concerned, we can draw the change in any diagrams. The result will be the same I have drawn. I&#x27;ve decided to join up with the 1st 1 so we know we are at point B, right? 82 s. Sorry is too. We know that the Fed cannot influence the average supply, but they can influence the agree demand. So what the Fed needs to do is engage in expansionary monetary policy either by increasing the money supply or lowering the interest rate or doing any combination of the two or any other sets of policy tools like, um, unorthodox. Um, I like forward guidance or quantitative easing. And so they want to shift. The agreement occur from 82 83 even higher than before, so that it intersects with a short drive aggressive like her. Who? The second store draggers a flicker of a higher point. So they need to do all this shift in bigger demand curve to restore the economy back to point C right here in the same vein. We can see that happening in the filibuster of diagram. Where&#x27;d point be? An expansionary monetary policy will stimulate, agree demand, and so the economy will move it along the second short term Philips curve all the way from Point B to point C right here. Unemployment is, but it&#x27;s natural level, but the inflation rate will be higher here. I haven&#x27;t drawn it here, but there should be a pi three right here, as you can see and this is related to port, see which acts. Which asks, Why might the Fed choose not to pursue the course of action described in Part B? Well, we just answered it in a way that if they do engage in an aggressive expansion policy, they will manage to restore the economy back to its natural level out but and natural level of employment. But this will result in the higher, possibly much higher inflation rate. Uh, this should be it should correspond to something like P three right here or pie three here. So the policy makers might my deem inappropriate to accept such a high level of inflation in order to reduce um, in order to close the Recessionary Cup, and this might be a reason not to pursue such course of action

Alex Loukas · Answer

moving on to question for suppose the economy&#x27;s in a longer and equilibrium party, drove the economy short run and longer, and Phillips curves well. That shouldn&#x27;t be very difficult, because we&#x27;ve done a couple of times now eso here on the left of drawing a very simple standard graft on the exact So we have the unemployment level, you on the y axis. We have inflation. Great time as always, the longer and Philip&#x27;s curve will be vertical and intersect. The exact is that the natural live off unemployment you won and, of course, the next in the downward sloping shoulders. Philips Curve will dissect the the longer filter midpoint A, which is where the economy is that since we&#x27;re in the long run equilibrium and appoint a the national level for unemployment inflation. Reply one prevail now in part B. Suppose a wave of business pessimism reduces agree demand show the effect of this shock on your diagram from partying. If the Fed undertakes expansionary monetary policy, candid return, the economy, the regional inflation rate and unemployment rate. Well, uh, here we&#x27;re dealing with negative agree demand shock. So from what we know from theory, the economy will shift along the Phillips curve so the folks care will not move. But the comet will move it on from point A to point B sins and agree Demand to think about the aggressive Langree demand graph. Agreed The man moves to the to the left so the new output level will be lower. There will be a recessionary God. And here this is reflected, uh, with the higher level, find employment. You too. And on the other hand, since the price level drops, we&#x27;ll also have a lower level of inflation High too. So where? Point B, higher unemployment, lower inflation? No in part. See, suppose the economy&#x27;s back in longer an equilibrium and then the price of imported oil rises. So the effect of this shock within your diagram and think what happens if the Fed undertake expansion? Montree policy And what happens when the Fed undertakes contractionary Montree policy? Well, this is even more interesting now. Every drawn the graph, the same graph on the right, and and now we know that the economy is being hit by supply shock. A serious one. This is kind of like what happened in the mid seventies and late seventies the U. S. And the rest of the world When OPEC decided to increase the price of oil, we&#x27;re dealing with a very bad supply. Shock s o the economy. Now the Sergeant Phillips Group will move S R P c once I start BC two to the right and they com e moves Appoint a here in the right to point C So the economy is experiencing a higher level of unemployment, which corresponds slower out bud and a high inflation rates. This is really bad, right? So we&#x27;re dealing with a classic tail off stagflation. Like exactly what happened The U S and, uh, in the seventies, Anais early eighties. Now, what can the fed do? If the Fed engages in expansionary monetary policy, it can return the economy to its original unemployment rate at point D. So remember nowhere Point C on the higher and shortening Philips curve, we can move it along it too pointy. Uh, the unemployment level goes back to you one, however ah, higher level of inflation will prevail. Okay, Bye. Three. This is a trade off. On the other hand, if the Fed engages in contractionary month to policy, it kind of returned the economy. That&#x27;s original inflation rate of point e right move along the other side of the new Philips curve. But the new level find employment will be even higher will be somewhere here. You three. I have a noted down by will be even higher. So this is not the same. It&#x27;s part, eh? Apart. Be sorry assed Barbie. Why&#x27;s this? Let&#x27;s think about it. This situation differs completely from party for Part B because in part of the the economy stayed on the same short on Philip skirt. But now in part, see, we saw that the economy moved to a higher sugar and Philip skirt, which gives policymakers it less favorable, trade off between inflation and unemployment, and these stems from the fact economy&#x27;s been hit by a negative supply shop.

Alex Loukas · Answer

moving on to question two. We&#x27;re being given that the Federal Reserve expands the money supply by 5% and party winning to use the theory of liquidity preference to illustrate in a graph the impact of this policy on the interest rate well falling from question one. We know that the theory of liquid the preference Khun B. Illustrated very vividly using the supply and demand Graff in the money markets on the XX. What have the point of money m on the Y axis who have interest? They are the money, the man curve will be downward sloping and there&#x27;s always the months of lack of will be vertical because it&#x27;s fixed by the central bank here. Since the Fed expands the money supply by 5% this means that we have a rightward shift. The money supply curve from M s one em is to and as a result, the initial interest rates are one will decline and reach are too right here. All right, in part B, we need to use the model factory demand and I greet supply to illustrate the impact of this change in the interest rate in back of the change in the interest rate on output and the price level in the short run. All right, well, we know how to do that. We&#x27;ll use the standard. Agreed to play angry demand graph on the XX. We have the quantity about. But why? On the y axis, we have the price level team as always, the long grand a great city like it will be vertical and intersects the exacts that the natural level thought with white one and the economy now is initially operates at the algorithm anchor of 81 on the aggressive spiker eh s one. So the economy&#x27;s initially at point A. Now, since the Fed expanse and money supply and the equilibrium straight will decline. And as a result, how&#x27;s worlds will increase their spending and invest more in new consumption goods maybe invest in durable goods and or maybe even new housing. And on top of that, firms will also increase their investment spending. So, as a result, the agri demand from shift to the right and we go right here from 81 82. The ignorant supply crew is unaffected in the short run. So they caught the economy will operate at the new point B. And what is that was that means this means that we have a short in fluctuation. The results of the higher level felt with white too. So the difference between why one y two is thie expansionary gas? The economy is experiencing a boot on foreign. Be all right, Port CIA asks one. The economy makes a transition from a short ironically room to its new longer and equilibrium. What would happen to the price level? Also, when I forgot to mention that point beat not only the the output expands most the price level increases from people on the B two, but now, over time when the economy is moving to its new longer and equilibrium, what&#x27;s happening along the transition path to the new longer equilibrium as the expected price level adjusts the expected one? Remember, the short run aggregates of liquor will also just because producers will adjust the production plants according clean. And so the aggregates of the shorter *** supply Kirm will shift to the left from A s want to Ieyasu. So now the economy&#x27;s Baggett Point C, which corresponds to the natural level folk with Y one, and the prize level will increase. Even more were p three, which is Wei Wei higher than when we started with people on and part four party follows and says, What would what will this change? How will this change? In the price? I will affect the demand for money and the equilibrium interest rates the once again right here in the bottom left. We need to resort to a standard money market graph. I have recreated the graph from party, eh? But now we know that the increase in the price level will cause an increase in the demand for money. Right? Everything costs more so people needed more money to pay for the for consumption investment. So the demand from UN increases from 81 to MD want empty too. And the ICC liberal interest rate will increase and go back to it&#x27;s our one, which is the natural rate of interest. So what is happening here is that price level just once again, equilibrium interest rate goes up and this is what is actually causing the ship of the output, the fall, and go back. Where is Logan level? And finally, party asks, Is this analysis consistent with the proposition that money has really effects in the short run, but it&#x27;s neutral in the long run. So is there no, it&#x27;s considered with theory. Yes, we just illustrated how this works. We showed that while output initially rises because of the increase in aggregate demand over time, we were full ones. Ashore drawn, Hagrid, supply curve, adjust according thing. So indeed, there are shortened money has really short of effects and real output over the longer, and money is mutual.

Arrushi Agarwal · Answer

this question is asking us about the effect on the aggregate demand and aggregate supply curve in various situations. In party, there is a white spit fear of depression on the part of consumers. In this case, the 80 girls shifts to the left. The output goes down on the price level. Gusteau Assuming there is no ratchet effect, this can be seen in the first diagram. The 80 Gulf shifts to the left First et cough can be taken as the blue line, which is the collusion et cough. Since it shifts to the left, it has become a divine or the red line. As we can see both the output on the price of go down. In the second part, we have a $2 entries in the excise tax on a back off cigarettes. In this case, the esseker. Just to the left. Yes, girl shifts to the left. It&#x27;s kind of seen in this diagram. Original Esko can be taken as the blue line and since it shifts had left, it becomes a S one or the red line over hill. Part C says reduction in interest rates at each price level. In this case, the eating of shifts to the right and output and price M boot. It&#x27;s gonna be seen over Hill assuming the original 80 to be the blue line on. By shifting into the type, we come to the Green Line, which is 82. As we can see, both output and prices have gone up in party a major re create a media increase in federal spending for health care. In this case, the IT girl shifts to the right on price and output level Go up. The S curve might also shift to the right since any real improvements in health care resulting from spending would eventually interest productive ity. If the ET golf shifts to the right, then we can see that it becomes the screen line on if the S curve shifts to the right. It also becomes the screaming barg e the expectation off rapid inflation. In this case, the 80 cove shifts to the right on output prices will go up if medical originally was the slough line. If shifts to the right, it becomes the screen 1 82 The output and prices will have both gone up. But if we have the compute disintegration off O P E. C. Causing oil prices to fall by 1/2. In this case, yes, golf shifts to the right and output goes up and price seven. Who&#x27;s down? This can be seen over Hill. If the original S Cove was the blue line and it shifts to the right, it becomes heir Students is the green line. As we can see, the output has increased while the price level has gone down. G but 10% reduction in porcelain in contacts rules. This will cause the ET cough to shift to the rap on does price an upper level to go up If a tick off shifts to the right, it would be called from 80 to 82 which is beauty cream on both output and price level are seen to be interesting part H A size of the interest in labor productivity with no change in nominal wages. In this case, the A s cough shifts right. The output and output goes up on Priceline comes down, it&#x27;s can be seen over here. Breaking the original es grove is a blue line and shifted gears gold as the green line. Since the chips to the right, causing it to become heirs to the price level has gone down and the output has gone up. Why? I 12% interest in nominal wages with no change in productivity. The A s girls In this case which shift to the left, the output will go down in price ever off. It&#x27;s going to seem him with the original S curve to the ears in the blue line. And since the chips should left, it becomes Here&#x27;s one. Just the red line price level has gone up on. The output has done for the last part, we have a depreciation in the international value off dollars. In this case, the a d go just to the right and esco shifts to the left equals ships. Right Shifts to left becomes Here&#x27;s one. This is a red line and 80 cope with on 16. I just

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Explain whether each of the following events shif…

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Gregory Mankiw

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