Macroeconomics Problem Set 3 Assignment Example | Topics and Well Written Essays - 1250 words

Macroeconomics Problem Set 3 - Assignment Exampled. What willing the capital-output ratio be at the Golden Rule steady-state? (Hint recall from Chapter 3 that for the Cobb-Douglas production function, the capital-output ratio is connect to the marginal product of capital).1. In this question, we examine how the goals of the catereral Reserve influence its response to shocks. Suppose that in scenario A, the supply cares unaccompanied about corroborateing the price level persistent whereas in scenario B, the Fed cares only about keeping output and employment at their natural levels. Explain how in each scenario the Fed would respond to the followingA decrease in velocity causes a downward shift on the aggregate demand. Prices are fixed in the short run meaning only output decreases. To fasten output and unemployment are at their natural rates Fed B should increase the notes provision to attain the initial equilibrium where prices and output will be constant. Fed, A should also increase the money supply to shift the aggregate demand curve upwards since this is the only way to ensure stable prices at their original equilibrium.This results to an upward shift of the supply curve. To ensure stable prices, Fed B should shed aggregate demand constant since prices will rise in the short run and then strickle in the long run achieving the natural rate of unemployment. This might however result to a recession.To keep output and unemployment at their natural rate Fed B should increase the money supply and then shift the aggregate demand curve upwards. This results to a new equilibrium at higher prices, further there is no loss in output.Based on the quantity equation MV=PY, if Fed reduces the money supply by 5% the aggregate demand curve will shift downwards. A decrease in M will hence result in a decrease in PY provided V is constant.In the short run, the assumption is that the price levels are fixed meaning that that the aggregate