Dynamics and the AS-AD model
Consider the following model of the economy:
AS: Pt = Pe
t + d (Yt-Yn)
IS: Yt = b – c it +eG-fT
Interest Rate Rule: it = in + a(Pt-PT)
where a, b, c , d, e and f are positive parameters.
a. What is the AD relation in this economy?
b. Suppose PT =1, Yn=100, b=101, c=100, e=2, f=1, G=T=0
What are the medium run values of P, Y and i?
c.
Dynamics and the AS-AD model
Consider the following model of the economy:
AS: Pt = Pe
t + d (Yt-Yn)
IS: Yt = b – c it +eG-fT
Interest Rate Rule: it = in + a(Pt-PT)
where a, b, c , d, e and f are positive parameters.
a. What is the AD relation in this economy?
b. Suppose PT =1, Yn=100, b=101, c=100, e=2, f=1, G=T=0
What are the medium run values of P, Y and i?
c. If G increased to 1, what would happen to P, Y and i in the medium run?
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