1. Please indicate whether the statement is true, false, or uncertain, and explain why. If the...
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1. Please indicate whether the statement is true, false, or uncertain, and explain why. If the statement has two parts, or if it is partly true and partly false, explain both parts. The evaluation of your answer focuses on the quality of your explanation. Given the following information: A country's economy is initially in a long-run equilibrium in which Y = Y*, with the ongoing expected inflation rate equal to 3 percent per year. Just before the next short run begins, a large number of residents of the country decide that imported foreign products have become superior in quality to domestically produced products, and they switch their spending patterns. (Assume that this large change in the perceived quality of the country's imports persists for a substantial period of time.) The economy shifts to a new short run equilibrium. Then, when the economy moves beyond this new short-run equilibrium, the expected rate of inflation changes. Statement to evaluate: Given these changes, the country's central bank will need to raise its interest rate target if it wants to guide the economy back to a long-run equilibrium with an inflation rate of 3 percent per year. [In your answer, you must draw one (or more) graph(s) and refer to the graph(s) in your explanation.] 1. Please indicate whether the statement is true, false, or uncertain, and explain why. If the statement has two parts, or if it is partly true and partly false, explain both parts. The evaluation of your answer focuses on the quality of your explanation. Given the following information: A country's economy is initially in a long-run equilibrium in which Y = Y*, with the ongoing expected inflation rate equal to 3 percent per year. Just before the next short run begins, a large number of residents of the country decide that imported foreign products have become superior in quality to domestically produced products, and they switch their spending patterns. (Assume that this large change in the perceived quality of the country's imports persists for a substantial period of time.) The economy shifts to a new short run equilibrium. Then, when the economy moves beyond this new short-run equilibrium, the expected rate of inflation changes. Statement to evaluate: Given these changes, the country's central bank will need to raise its interest rate target if it wants to guide the economy back to a long-run equilibrium with an inflation rate of 3 percent per year. [In your answer, you must draw one (or more) graph(s) and refer to the graph(s) in your explanation.]
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In the short run the shift in consumer preferences towards superior foreign products can lead to a d... View the full answer
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