ECOS2002 - Tutorial 6
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ECOS2002 - Tutorial 6
1. Consider the following AS-AD model:
AS P = (1 + m)Pe F (1 − 
, z)
AD Y = Y (i, G, T)
IR − Rule i = in + a(P − PT)
Assume that the economy starts at the natural level of output.
(a) Show the effects of a decline in consumer confidence on the position of the AD and AS curves both in the short run and in the medium run.
(b) Show the effects of an increase in unemployment benefits on the position of the AD and AS curves both in the short run and in the medium run.
2. Dynamic AS-AD model: Consider the following model of the economy (we ignore the role of G and T on aggregate demand; also, to simplify the algebra, we assume that output depends on the interest rate only):
AS Pt = Pte + d(Yt − Yn)
IS Yt = b − ci
IR − Rule it = in + a(Pt − PT)
where a, b, c, and d, are positive parameters.
(a) What is the AD relation in this economy?
(b) What are the medium-run values of P , Y and i?
Suppose PT = 1 and Yn = 100 .
(c) What is the medium-run equilibrium value of the interest rate?
(d) Now assume that Pte = Pt − 1 . Substitute the short-run equilibrium for Yt from
the AD relation into the right-hand side of the AS relation. Write this as a relation between Pt and Pt − 1 . This is a difference equation. Show that the coefficient on Pt − 1 is less than 1.
3. The neutrality of money
(a) In what sense is money neutral? Why don’t we refer to fiscal policy as being neutral?
(b) What is the reason that short-and medium effects of policies are so different in the AS-AD model.
4. Discussion
Discuss the statement: Since neither fiscal nor monetary policy can affect output in the medium-run, we should not use active stabilization policy!
Do you agree?
2023-01-08