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nuaa'tlnn 1 [In marlin] Assume that the central bank ntlnws the tnllnwlng; mnhetar'gr pnllw fra-nr]: rule: {r} EFi'=[ar;}+, h-jr-I] Hate that, REF,...

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nuaa'tlnn 1 [In marlin]
Assume that the central bank ntlnws the tnllnwlng; mnhetar'gr pnllw fra-flnr]: rule: {r} EF—i’=fi[ar;—fi}+fifi, fih-fljr-I]
Hate that, REF, schfi and F, are def‘med as In lectures. fitanclii are parameters. The interest rate faclng the rrarkeu is R, = RF + f, where f is financial frictInn. A5 schedule is represented hythe I‘dHnu-flng equatinn:
n, = a: + it; + a Inflatlnn equectatinns area mixture at backward Innkmgekpectatisns and expectatlnns
anchnred tcrflte InflatInn target: H:=IE+{l-I)It_1
ThetEscheduleis _
Ft=fi_h[Rt-F} [a]: [meme the AD curve In the case when the central bank uses the alscwe nule {*J. Denture
the as anre. [a mans: Assumethat it: fit = 1, i: ELLE =tT- = 1,1? = Hand 17': 3. Alsnassunsethattnperiadfl
the E'E-EH'lfll'l‘l'fl' is in Its1nng-run EL'ILflHbt‘iul‘I‘t, In particular, E = I], at = I] and f = ID.
Hate: 1I|I.rhen duping- ynur calmlatinns in {Isl-{c}, rnund uptn flte third decimal plane. [Isl Assume that In perind 1 flseecnnnmy is hlt h'rthe demand shackfi = -2 lasting-far tum perinds and there is alsn financial tricfinn f = 'l. 1astlng fnr twnper-Inds. Fund the value:
at Inflatinn, shnrt-run nutput and real Interest rate facing the markets in perleds 1,1
and 3. Ekplaln haw the enannmy will adjusttcrIts Icing-run equilibrium starting frnrn
perind I.Acnnmpany mu answer wtfl'l a welldalselled graph. [ti manusl [cl New assume that In a-ddltinn tn the demand shed: and financlal frlctinn frnm part {hl
lasting fnrtwn perinds, the ecnnnmsr Is alse hit tun-[the supply shack a = 2 lasting for 1 period. find the values at Inflatinn, shart-run autput and real Interestrate facing the
markets in perinds 1, I and 3. Ettpladn haw the ecnnnn'nl will adjusttn its lung-run
equilihcl um startlng tram perind 4. Ancnrrmanlr 1mm answer untha well-labelled graph. [E
marks]

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[d]: Briefly explaln how woLIcl you answers to [hi and to] would change qualitatl'u'el'r It i
were higher. {4 rnarltsl misstlon 1 [In mat-Its] A small oountnrin the Atlantic Atlantooia has been exposed to'dte oonseouenoes of a
InrorldttIIdet‘inannclal ctIsIs. WIthout pollwactlonfs tlte oountnr IIIIiII inetrltahltr slide into a
[posslhl'gr deep] reoesslon. The central hanlt has its target intenst rate set atu.5'ifi. The government has ettlsting debt. but Is oonsiderlng a large Increase In InfrastructLre spendlng. ‘rou have been appointed as flte eoonornlc adviser to Atlantic Atlantopia. Erltlcallf ettantlne the
opt-Ions auallahleto both the oentral hanlt and gouemmenttoavoid a recesslon. Ensure to Include in your analysis the possible oonsequenoes of thelr actions or nonnactlons. Consult the
rulsrto for marking gulclellnes. Note that you are required to articulate the Issue, and then provIde an anahtsls, positlon and critique. 1III-ford lirnlt: lulu-12m words. Please Include word count atthe end ofthe essay.

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