Consider Country A, where the Dynamic Aggregate Demand (DAD) is:

Yt=(/(1+Y))(t*)+(1/(1+Y))t

and the Dynamic Aggregate Supply (DAS) is

t = _t-1 + (Yt-)+vt

All the variables and parameters are as defined in class. The potential level of output and the central bank's target for the inflation rate are constant and the same in both countries, with *= 2%

The standard assumptions on the parameters hold: > 0 ; > 0; >0 ; >0 ; Y > 0.We know that all the parameters are the same in both countries, with the exception of Y which is : Country A Y =1 and country B Y = 0.25.

Consider now Country C. Country C has the same DAD and DAS as Country A, with the only difference being that the central bank's target for the inflation rate is * = 1.5% in Country C, while the target is still * = 2%in Country A.

All the other parameters and assumptions of the model are the same in the two countries, included the parameters in the monetary policy rule

These questions are multiple question

1)The DAS in country A

-Is steeper that the DAS in country C

-Is flatter that the DAS in country C

-Has the same slope as the DAS in country C

2)A one period negative 1% supply shock vt = -1% would generate

-A smaller increase in output in country A than in Country C

-An increase in output in country C and a decrease in output in Country A

-A smaller decrease in inflation in Country A than in Country C

-The same increase in output in country A and in country C

3)Assume that at time t both countries are in a short run equilibrium with t = 2.3% and (Yt-) = -1.2%, the nominal interest rate it is

-Lower in Country A

-Lower in country C

-The same in both countries

4)Assume that at time t both countries are in a short run equilibrium with t = 2.3% and (Yt-) = -1.2%, the real interest rate rt is

-Lower in Country A

-Lower in country C

-The same in both countries