homework8_solutions_v2 (2).pdf

homework8_solutions_v2 (2).pdf - Homework#8 Solutions Due...

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Homework #8 Solutions Due: 6PM, November 10 Please answer three of the four questions. Problem #1 Suppose there are two countries, A and B, which are equivalent except for the motivations of the central bank. Central Bank A wishes to stabilize the price level only, and Central Bank B wishes to stabilize output only, both in the long and short run. For each of the following two scenarios, please characterize what happens to short run prices and output, long run prices and output, and the short run response of each central bank. Use the AD-SRAS-LRAS graph to defend your answers. Note for solutions: students’ answers about the long run may di er based on if they consider the central bank’s actions. I imagined the ’long run’ being what would happen in the absence of intervention, but if the central bank intervenes then the result of that intervention is a fine answer for what happens in the long run.
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