The medium-run equilibrium is characterized by four conditions:
1. Output is equal to potential output Upper Y equals Upper Y Subscript n.
2. The unemployment rate is equal to the natural rate u equals u Subscript n.
3. The real policy interest rate is equal to the natural rate of interest r Subscript n where aggregate demand equals Upper Y Subscript n.
4. The expected rate of inflation pi Superscript e is equal to the actual rate of inflation pi.
Which of the following best characterizes the behavior of inflation in a medium-run equilibrium if the level of expected inflation is formed so pi Superscript e equals pi (negative 1)?
a. If expectations of inflation are formed so that πt = πt-1, characterize the behavior of inflation in a medium-run equilibrium.
b. If the level of expected inflation is πbar, what is the level of inflation in the medium-run equilibrium?
c. Write the IS relation as Y = C(Y-T) + I(Y, r+x) + G. Suppose rn is 2%. If x increases from 3 to 5%, how must th/e central bank change rn to maintain the existing medium-run equilibrium?
d. Suppose G increases. How must the CB change rn to maintain the existing medium-run equilibrium?
e. Suppose T decreases. How must the CB change rn to maintain the existing medium-run equilibrium?
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Ответ:
By increasing the amount of money in the economy, the central bank encourages private consumption. Increasing the money supply also decreases the interest rate, which encourages lending and investment. The increase in consumption and investment leads to a higher aggregate demand.
Explanation:
It is important for policymakers to make credible announcements. If private agents (consumers and firms) believe that policymakers are committed to growing the economy, the agents will anticipate future prices to be higher than they would be otherwise. The private agents will then adjust their long-term plans accordingly, such as by taking out loans to invest in their business. But if the agents believe that the central bank’s actions are short-term, they will not alter their actions and the effect of the expansionary policy will be minimized.