2. Let a country’s stochastic SAS curve be given by ? ?? ?? ?? e Y Y * , where ? equals 5 in 50% of...

Question

2. Let a country’s stochastic SAS curve be given by ? ?? ?? ?? e Y Y * , where ? equals 5 in 50% of the cases and -5 in the other 50%. The society’s indifference curves are ellipse shaped in a Y/? space, centred in (Yd, 0). A moderately conservative central bank is in charge of setting output and inflation optimally. Whenever ? ? 5 sets inflation at -2%; when ? ? ?5 inflation is set at 6%.
	
Document Preview: 2. 
 
e
Let a country’s stochastic SAS curve be given by Y?Y*?????? , where 
? equals 5 in 50% of the cases and -5 in the other 50%. The society’s 
d
indifference curves are ellipse shaped in a Y/ ? space, centred in (Y , 0). A 
moderately conservative central bank is in charge of setting output and 
inflation optimally. Whenever ??5 sets inflation at -2%; when ???5 
inflation is set at 6%. 
 
(a) What is the rationally expected inflation rate? 
 
- the answer to this point is functional to better understand the 
next ones: (b) and (c) 
- state clearly/describe the formula and the assumptions you are 
using 
- compute the mathematical result

(b) Let Y*=100. What are the income levels in periods of positive supply 
shocks and in periods of negative supply shocks, respectively?  
 
- the answer to this point is functional to better understand the 
next one: (c) 
- state clearly/describe the formula and the assumptions you are 
using 
- compute the mathematical result(c) Represent graphically the reaction function for the moderately 
conservative central bank and derive its slope 
 
- Here you should use a graph, where you summarise all the 
information gathered from previous answers (a) and (b) 
- state clearly/describe the curves you are using in the graph 
- compute the mathematical result by using the information 
appearing in the graph 
 
Imagine that the society decides to evaluate the replacement of the 
moderately conservative central bank with an ultra-conservative central 
bank. 
 
(d) which one of the two monetary authorities should be preferred by the 
society? Discuss.

- The only way you have to explain this formally is to exploit the 
graphical analysis of point (c); 
- If you think the question does not provide enough details in order 
to reach a clear-cut answer you can introduce some standard 
elements that allow you to do so, eventually (before doing that, 
make sure you can effectively answer with the elements 
originally at hand and...

Robert · Accepted Answer

2. 
Stochastic SAS: Y = Y* + π – π
e
 + σ 
σ = 5, with probability = 0.50 
σ = -5, with probability = 0.50 
Further, when σ = 5, moderately conservative central bank set inflation at -2% 
And when σ = -5, moderately conservative central bank set inflation at 6% 
(a) 
There are 50% chance that moderately conservative central bank set inflation at -2% and 50% 
that it would set inflation at 6%. 
So, rationally expected inflation rate (π
e
) = 0.50*(-2) + 0.50*(6) = 2% 
(b) 
We make use of Stochastic SAS equation to derive income levels in the periods of positive 
supply shocks (i.e.

2. Let a country’s stochastic SAS curve be given by ? ?? ?? ?? e Y Y * , where ? equals 5 in 50% of the cases and -5 in the other 50%. The society’s indifference curves are ellipse shaped in a Y/?...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment