Reference no: EM13982129
Imagine the economy starts off at the steady state, with m=v=1 and b=1/2; additionally, suppose that the Fed's infaltion target (π-bar) is 1% and that the real federal fund rates (r-bar) is 1%. In period 1, political uncertainty causes a negative AD shock that lasts two periods (period 1 and 2).
Find the (short-run) equilibrium using the model for each period t=1,2,3,4 and for the steady state and draw a diagram at each period. With this information at hand, answer the following question:
a) what is the short run output in period 1 ?
b) what is the interest rate in period 2 ?
c) what is the short run output in period 2 ?
d) what is the interest rate in period 3 ?
e) what is the inflation rate in period 3?
f) what is the short run output in period 4 ?
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