Problems Ch. 12 and Ch. 13
0. Plot the AS/AD model and use full notation. Write down the AS/AD model. Explain
briefly all the elements of each formula and what each equation represents.
1. Event 1. AS/AD and oil shock. Economy is at steady state (long-run equilibrium).
There is a sudden positive (or negative) temporary oil shock. Use AS/AD graphs and
formulas to explain what happens to the economy in time after the shock. You must
give arguments and prove your statements. Also plot the dynamics in time of the
short-run output and the inflation rate.
2. Event 2. AS/AD and permanent change in target inflation. Economy is at steady state
(long-run equilibrium). The Central Bank changes the target inflation upward (or
downward). Use AS/AD graphs and formulas to explain what happens to the
economy in time after the permanent change. You must give arguments and prove
your statements. Also plot the dynamics in time of the short-run output and the
inflation rate.
3. Event 3. AS/AD and aggregate demand shock. Economy is at steady state (long-run
equilibrium). There is a sudden temporary positive (or negative) aggregate demand
shock. Use AS/AD graphs and formulas to explain what happens to the economy in
time after the shock. You must give arguments and prove your statements. Also plot
the dynamics in time of the short-run output and the inflation rate.
4. Write down the simple monetary policy rule and explain each element included in the
formula. Given actual numbers for the formula determine what actions the Central
Bank should take according to the rule.