Question: Need help with bellow. Yr: Current output at time t. Yf: Potential output at time t. Yr: Short-run output at time t. Ct: Consumption at
Need help with bellow.




Yr: Current output at time t. Yf: Potential output at time t. Yr: Short-run output at time t. Ct: Consumption at time t. it: Investment at time t. Gt: Government purchases at time [2 th Exports at time t. th: Imports at time t. rt: Real interest rate at time t. ac: Consumption share of potential GDP. a6: Government consumption share of potential GDP. REX: Export share of potential GDP. am: Import share of potential GDP. (1;: Parameter in the investment function. ,3: Parameter in the investment function. F: Equilibrium real intert rate [the marginal product of capital). The national income identity: Y: = Cf+If+Gf+EXf!Mt. (2) (2) specifies how the economy's output may be used. Assume that Ct, Gt, EXE, [Mt are constant fractions of potential output: CI = etc 7:, (3) Gt = ac; 37b (4) EX: = (13' '37:, (5) M = am 5'4. (6) Question 3 Consider the ASAD model discussed in Lecture 5. The AD curve. is given by: 1". = a mum 1r). {4) where in\"; is shortrun output, 1r; is current ination and r is an ination target pursued by the central bank. The A3 curve can be written: m:m-1+y1+m {5) a. Explain where the two equations come from and explain the intuition behind them. b. How would you interpret a and 0'? Which values must they assmne in a. steadystate, i.e. in the long mm. c. Analyse the effect of making the ination target more ambitious, i.e. the effect of lowering 1r. Illustrate your answer in a diagram and explain the intuition. (1. Suppose that the demand for domestic goods decreases abroad, so that the export share of potential output temporarily decreases. Analyse the effects on ination and shortrun output using a diagram
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