Suppose
,
,
,
,and a¯im = 0.20.For any given
,
Equals __________ and the economy __________.
A)0.00;is in its long-run equilibrium
B)1.05;has experienced a positive aggregate demand shock
C)0.45;has experienced a positive aggregate demand shock
D)-0.15;has experienced a negative aggregate demand shock
E)0.05;has experienced a positive aggregate demand shock

Question

Suppose 
, 
, 
, 
,and a¯im = 0.20.For any given 
, 
Equals __________ and the economy __________.
A)0.00;is in its long-run equilibrium 
B)1.05;has experienced a positive aggregate demand shock 
C)0.45;has experienced a positive aggregate demand shock 
D)-0.15;has experienced a negative aggregate demand shock 
E)0.05;has experienced a positive aggregate demand shock

Quizplus · Accepted Answer

The Phillips Curve equation is given by Δπ_t = -a¯im + β(Δy_t - y¯). Where Δπ_t is the change in inflation, a¯im is the constant term, Δy_t is the change in output and y¯ is the natural rate of output. Here, we are given the values of a¯im and two points on the Phillips Curve (Δπ_t, Δy_t). To solve for β, we can use either point and substitute the values into the equation. Using the first point, we get 0.20 = -a¯im + β(1.05 - y¯). Solving for β, we get β = (0.20 + a¯im - 1.05 + y¯)/0.45. Since a¯im = 0.20 and y¯ = 0, β = 0.44. Therefore, using the second point, we get Δπ_t = -0.20 + 0.44(0.05 - 0) = 0.022, which is positive. This means the economy has experienced a positive aggregate demand shock. Thus, the best choice is E.

Suppose ,And A¯im = 0.20.For Any Given