How do I do all the questions in Exercise 5.1?
Read the inflation shock example in Jones’ textbook (event 1), Section 13.5. Supposethe size of the shock is o0. Remember that the initial values for inflation and short-runoutput are 0 = and e Y0 = 0. The first two questions correspond to what was done inclass, with o denoted by o0.1. What is initial response of inflation 1 and initial output as e Y1 to the oil priceshock? Hint: the (AS) curve at time t = 1 is 1 = + Y1 + o0.2. Calculate inflation at time t t as a function of time t and the parameters of themodel. Calculate short-run output at time t e Yt as a function of time t and theparameters of the model.3. Now suppose the parameters of the (AS) and (AD) curves take the following values.The size of the oil price shock is given by o0 = 10%. The aggregate demand shockis set to a = 0. The response of investment to interest rates is such that b = 1/2.The monetary policy rule parameter is given by m = 1/2. Finally, = 1/2, and = 2%. Graph the value for inflation t and for short run output e Yt as a functionof time, for t = 0, 1, 2, 3, …, 29, 30.4. Now assume that monetary policy is more agressive, with m = 5, with all otherparameters unchanged. Graph the value for inflation t and for short run outpute Yt as a function of time, for t = 0, 1, 2, 3, …, 29, 30.5. Comment briefly on your results.
