Answer E Only

$(30$pts$)$ Consider an IS$-$MP$-$Phillips Curve model, given by the equations:

$R_t=MP$

${}_t\frac{?}{b}=ar(v)widetilde(Y{)}_t$

$R_t=\frac{-1}{(\frac{?}{\text{b}\text{a}\text{r}}(b))}$widetilde$(Y{)}_t\frac{+}{b}ar(r)+\frac{()}{(\frac{?}{\text{b}\text{a}\text{r}}(b))}$

a$)(5$ pts$)$ What effect does contractionary policy have on output and inflation? What effect does expansionary policy have on output and inflation?

b$)(5$pts$)$ Illustrate these three curves in a pair of graphs, with widetilde$(Y{)}_t$ on the horizontal axis. Label everything.

c$)(5$ pts$)$ On the graphs above, illustrate the effects of a shock which decreases Consumption. Briefly explain your reasoning below:

d$)(10$ pts$)$ Draw the graphs from part b$)$ again, then illustrate the monetary policy response that would negate the effect of the above on shock on output.

e$)(5$ pts $)$ Is the monetary policy response taken here expansionary or contractionary?

$(30$pts$)$ Consider an IS$-$MP$-$Phillips Curve model, given by the equations:

$R_t=MP$

${}_t\frac{?}{b}=ar(v)widetilde(Y{)}_t$

$R_t=\frac{-1}{(\frac{?}{\text{b}\text{a}\text{r}}(b))}$widetilde$(Y{)}_t\frac{+}{b}ar(r)+\frac{()}{(\frac{?}{\text{b}\text{a}\text{r}}(b))}$

a$)(5$ pts$)$ What effect does contractionary policy have on output and inflation? What effect does expansionary policy have on output and inflation?

b$)(5$pts$)$ Illustrate these three curves in a pair of graphs, with widetilde$(Y{)}_t$ on the horizontal axis. Label everything.

c$)(5$ pts$)$ On the graphs above, illustrate the effects of a shock which decreases Consumption. Briefly explain your reasoning below:

$(30$ points$)$ Consider an IS$-$MP$-$Phillips curve model intended to explain policy responses to the Great Recession.

a$)(5$ points$)$ Below, illustrate an IS$-$MP$-$Philips model $(2$ graphs$).$

b$)(5$ points$)$ In those graphs, Illustrate the effect of a negative shock to demand.

c$)(5$ points$)$ Illustrate an MP curve in the above graphs representing the policy that the monetary authority should pursue to normalize output after the shock.

d$)(10$ points$)$ Suppose that monetary policy simply doesn't work for some reason. Interpret this as the MP curve simply NOT shifting from its initial position. What policy can be used to recover from the recession if not monetary policy? Explain how this would work below:

e$)(5$ points$)$ Below, illustrate graphs of Output and inflation over time $($impulse responses$)$ in the economy explained above. Mark$/$label the points in time where the initial shock, monetary policy, monetary policy failure, and your policy response from part d are illustrated.