Suppose that an economy's aggregate demand curve is: Y=1,000 1,000, where Y is short-run equilibrium output and is the inflation rate, measured as a decimal. Potential output Y equals 950, and the initial inflation rate is 10 percent (r= 0.10). a. Find output for this economy in short-run equilibrium and inflation in long-run equilibrium. The short-run equilibrium output is 900 The rate of inflation at the long-run equilibrium is 5 percent. b. Suppose that, each quarter, inflation adjusts according to the following rule: Next quarter's inflation = current quarter's inflation - 0.0004(Y" - Y). Using 0.10 (10 percent) as the inflation rate for current quarter, and the first short-run equilibrium output value computed in part a, find the value of inflation for each of the next five quarters in table below. Remember, the value for Y will continuously change as the inflation rate changes according to the given relationship Y= 1,000-1,000 (Note: Current quarter is denoted as "Quarter O" in the table below.) Instructions: Enter your responses for the inflation rate should be presented in decimal form (not as a percent value) rounded to three decimal places. (YY) or (950 Y) Next quarter's inflat Quarter 0 Quarterly output (Y) 950 0.10 < Prev 4 of 14 Next > www The short-run equilibrium output is 900 The rate of inflation at the long-run equilibrium is 5 percent. b. Suppose that, each quarter, inflation adjusts according to the following rule: Next quarter's inflation = current quarter's inflation - 0.0004(Y* - Y). Using 0.10 (10 percent) as the inflation rate for current quarter, and the first short-run equilibrium output value computed in part a, find the value of inflation for each of the next five quarters in table below. Remember, the value for Y will continuously change as the inflation rate changes according to the given relationship Y= 1,000-1,000rz (Note: Current quarter is denoted as "Quarter O" in the table below.) Instructions: Enter your responses for the inflation rate should be presented in decimal form (not as a percent value) rounded to three decimal places. (YY) or (950 Y) Next quarter's inflat Quarter 0 Quarterly output (Y) 950 0.10 1 0.08 2 6.8 3 6.08 4 5 its long- For each consecutive quarter in the table above, the rate of inflation is coming closer to run value computed in part b and the difference between Y and Yis decreasing
