University of Southern California AS and IS Curve Questions

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Rzznnn

Economics

University of Southern California

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There are two questions in short-run model. One is about IS Curve, and another one is about AS Curve. Please help me solve these two questions in two pictures. Thanks

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(1) For the short-run model of the economy, the IS curve is written as YT= a-b(Rt-r) . Answer the following questions about the IS curve.

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(1) For the short-run model of the economy, the IS curve is written as Ỹt = ā - 5(Rt - 7). Answer the following questions about the IS curve. Answers should be as complete as possible. Definitions should include both a statement describing the term in words as well as any mathematical symbols used to define the determine. a) Define Vt b) Define ā c) Define 5 d) Define Rt e) Definer = f) Now, assume ā= 0, F = 2%, b 3/4, and initially Rt=2%. Explain what happens to short-run output and the slope and intercept of the IS curve when: i) rises from 2% to 4%. ii) āc increases by 1% (that is, by one percentage point). g) Explain how a monetary policy rule and the IS curve can be used to derive the aggregate demand (AD) curve. Write down the AD curve if the monetary policy rule is Rt - = m(1lt – ī). 3 (2) For the short-run model, the AS curve is the price-setting equation used by firms in the economy: Ilt = Tt-1 + vự+ 7. Answer the following questions about the AS curve. Answers should be as complete as possible. Definitions should include both a statement describing the term in words as well as any mathematical symbols used to define the determine. a) Define it b) Define it-1 c) Define y d) Define 7 e) How does the rate of inflation change from t to t+1 when the output gap is positive? What happens to the intercept of the AS curve? f) How does the rate of inflation change from t to t+1 when the output gap is negative? What happens to the intercept of the AS curve? g) Explain why the AS supply curve moves in response to the output gap? h) In the middle of the 1980s, oil prices declined sharply. Using the AS/AD framework, explain the macroeconomic consequences of a one-time negative shock to the inflation rate, such as the type that would occur because of the sharp decline in oil prices. Assume that the central bank takes no action in response to this positive supply shock. Please outline what happens in the short run and explain how the economy returns to equilibrium.
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Running head: MACROECONOMICS

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Macroeconomics
Name
Date

MACROECONOMICS

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1) Y t= a-b (Rt-r)
a) Define Y t
This represents the output of the market. This represents the total amount of goods that are
purchased by consumers. The output is for the whole economy as it incorporates both
expenditures of the households and the government.
b) Define a
This represents the total income of the household. It shows all the income that the household
receives in a given time period.
c) Define b
This is the income multiplier. As a fraction, it represents the multiplier with the denominator
having a value that represents the marginal propensity to consume.
d) Define Rt
This represents the percentage of disposable income as a percentage of the total income. The
disposable income is the income the individuals are willing to spend on investments and other
expenses.
e) Define r
This represents the investment r...


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