is the output gap with no cost push shock for simplicity aShow that inflation

Is the output gap with no cost push shock for

This preview shows page 2 out of 2 pages.

𝑡 is the output gap (with no cost-push shock for simplicity). a. Show that inflation 𝜋 𝑡 is given by: 𝜋 𝑡 = κ𝐸 𝑡 [? 𝑡 + β? 𝑡+1 + β 2 ? 𝑡+2 + ⋯ ] b. Suppose that the central bank would like to reduce inflation. It announces a contractionary policy whereby it will reduce the output gap starting from some point in the future (brought about by higher interest rates). What happens to current inflation after the announcement, but before the policy is implemented? c. Now suppose that many politicians are known to oppose the policy in part b. Might this change the effects of the policy? Explain. d. The IS curve is: ? 𝑡 = 𝐸 𝑡 [? 𝑡+1 ] − (𝐸 𝑡 [𝑟 𝑡+1 ] − δ) σ . Putting δ = 0 for simplicity, show that the output gap ? 𝑡 is given by: ? 𝑡 = −𝐸 𝑡 [𝑟 𝑡+1 + 𝑟 𝑡+2 + 𝑟 𝑡+3 + ⋯ ]/σ e. Now suppose the central bank announces today that it will raise the nominal interest rate in the future. What happens to the current output gap after the announcement, but before the policy is implemented? f. Given the effect of the output gap on inflation found in part a, can we say what happens to the real interest rate?
Image of page 2

You've reached the end of your free preview.

Want to read both pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors