3. IS-MP/Phillips (20 pts). By 2021, vaccines were becoming available and it seemed that the country...

    

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3. IS-MP/Phillips (20 pts). By 2021, vaccines were becoming available and it seemed that the country was moving past the Covid outbreak. Consumers were out shopping and travelling again. However, inflation jumped. What has happened since then? Gather the data below, and then graph these changes in the IS-MP model. Year Potential GDP (in billions of 2012 chained dollars) 2021, Q4 19,997.7 20,362.0 (1) Real GDP (in billions of 2012 chained dollars) (ii) Output Gap (in percent to 2 decimals) Inflation 30-year mortgage interest rate (1) 3.08 30-year expected inflation rate (7) 6.66 2.07 2022, Q4 a. (3 pts) Data (i) (0.5 pts) Gather the data from the BEA for real GDP in 2021 Quarter 4 and 2022 Quarter 4 for (i) above. (ii) (1 pt) Calculate the output gap for 2021 Q4 and 2022 Q4. (iv) Long-term real interest rate (r) 2.45 (iii) (0.5) Gather the data for the inflation rate in 2021 Q4 and 2022 Q4, using the BEA data 1.1.7 for "Percent Change from Preceding Period in Prices for Gross Domestic Product" (quarterly data). (iv) (1 pt) Calculate the long-term real interest rate. b. (9.75) Graphs i. (6.25 pts) Graph the data for 2021 Quarter 4 in the IS-MP/Phillips Curve model and label this point "A." ii. (3.5 pts) In February of 2022, Russia invaded the Ukraine, and West Texas crude oil prices rose from $77.33 per barrel in 2021 Quarter 4 to $108.83 in 2022 Quarter 2.5 Which variable in the Phillips Curve equation would this event affect? How would this affect inflation? Show this as point "B" on your graph above (you may use generic notation). (Assume all else constant.) c. (7.25 pts) Between March and December, 2022 (from the end of quarter 1 to the end of quarter 4), the Federal Reserve raised the target Federal Funds Rate 5 times from 0.08% to 4.33%.6 (Assume all else constant.) i. (1 pt) What was the effect on the long-term real interest rate? ii. (1 pt) Will these changes be felt immediately in the IS-MP model? iii. (5.25 pts) Show graphically above where the Fed hopes the economy will be once the full effect of the rate changes are felt, and label this point "C." What trade-off does the Fed face with this policy? 3. IS-MP/Phillips (20 pts). By 2021, vaccines were becoming available and it seemed that the country was moving past the Covid outbreak. Consumers were out shopping and travelling again. However, inflation jumped. What has happened since then? Gather the data below, and then graph these changes in the IS-MP model. Year Potential GDP (in billions of 2012 chained dollars) 2021, Q4 19,997.7 20,362.0 (1) Real GDP (in billions of 2012 chained dollars) (ii) Output Gap (in percent to 2 decimals) Inflation 30-year mortgage interest rate (1) 3.08 30-year expected inflation rate (7) 6.66 2.07 2022, Q4 a. (3 pts) Data (i) (0.5 pts) Gather the data from the BEA for real GDP in 2021 Quarter 4 and 2022 Quarter 4 for (i) above. (ii) (1 pt) Calculate the output gap for 2021 Q4 and 2022 Q4. (iv) Long-term real interest rate (r) 2.45 (iii) (0.5) Gather the data for the inflation rate in 2021 Q4 and 2022 Q4, using the BEA data 1.1.7 for "Percent Change from Preceding Period in Prices for Gross Domestic Product" (quarterly data). (iv) (1 pt) Calculate the long-term real interest rate. b. (9.75) Graphs i. (6.25 pts) Graph the data for 2021 Quarter 4 in the IS-MP/Phillips Curve model and label this point "A." ii. (3.5 pts) In February of 2022, Russia invaded the Ukraine, and West Texas crude oil prices rose from $77.33 per barrel in 2021 Quarter 4 to $108.83 in 2022 Quarter 2.5 Which variable in the Phillips Curve equation would this event affect? How would this affect inflation? Show this as point "B" on your graph above (you may use generic notation). (Assume all else constant.) c. (7.25 pts) Between March and December, 2022 (from the end of quarter 1 to the end of quarter 4), the Federal Reserve raised the target Federal Funds Rate 5 times from 0.08% to 4.33%.6 (Assume all else constant.) i. (1 pt) What was the effect on the long-term real interest rate? ii. (1 pt) Will these changes be felt immediately in the IS-MP model? iii. (5.25 pts) Show graphically above where the Fed hopes the economy will be once the full effect of the rate changes are felt, and label this point "C." What trade-off does the Fed face with this policy?

Answer rating: 100% (QA)

a 3 pts Data i Real GDP in 2021 Q4 199977 billion 2012 dollars Real GDP in 2022 Q4 203620 billio... View the full answer