What is the rationally expected inflation rate

Reference no: EM13116509

Let a country's stochastic SAS curve be given by Y = Y* + Π - Π^e + σ, where σ equals 5 in 50% of the cases and -5 in the other 50%. The society's indifference curves are ellipse shaped in a Y/ Π space, centred in (Y^d, 0). A moderately conservative central bank is in charge of setting output and inflation optimally. Whenever σ = 5 set inflation at -2%; when σ =-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

- 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 that the elements you introduce do not conflict with the original setup of the question);

- Check whether the theory, the real world or the common sense suggest a different answer than the clear-cut answer, in order to refine your judgement

Reference no: EM13116509

Questions Cloud

Identify the major inputs to the master budget : A master budget is a detailed and comprehensive analysis of organizations long- and short-term goals. 1. Identify the major inputs to the master budget and the usefulness of each.

Is kinesin or dynein used for the following processes : Is kinesin or dynein used for the following processes?

Find the probability neither truck is available : The probability the second truck is available is .51, and the probability that both trucks are available is .41: What is the probability neither truck is available?

Global manufacturing : You are employed by a CPA firm that has an international client, Global Manufacturing, with home offices in a country in the European Union.

What is the rationally expected inflation rate : What is the rationally expected inflation rate and the answer to this point is functional to better understand the next ones: (b) and (c)

Illuminate a specimen under a microscrope : How is the wavelength of light used to illuminate a specimen under a microscrope related to the power of resolution for a microscope?

Corporate compliance report : Using your own organization or an organization with which you are familiar, develop a report in which you outline a plan to implement enterprise risk management based on the Committee of Sponsoring Organizations of the Treadway Commission

Find out how far from the center of the earth this location : Find out how far from the center of the earth this location is. The mass of the earth is 5.98x10^24 kg. The mass of the moon is 7.35x10^22kg. The mean distance between the moon and the earth is 3.85x10^8 m

Pretend you are a top national microbologist reasearcher : Your working at a remote field station and you've been given a container of undentified mostly microscopic. Your job is to determine if the organisms are bacteria, unicellular algae, or protozans.

User Account

All Pages