Suppose the economy is initially at full employment. Suppose further that in period 1 households experience an increase in their subjective discount factor from β to β′ > β. This type of shock is known as a natural rate shock. Characterize graphically the effect in period 1 on consumption of non-tradables, unemployment, the relative price of non-tradables, and the real wage measured in units of tradable goods under two alternative monetary policy regimes: A. A fixed exchange rate regime. B. A floating exchange rate regime in which the central bank pursues full employment and price stability.

Suppose the economy is initially at full employment. Suppose further that in period 1 households experience an increase in their subjective discount factor from β to β′ > β. This type of shock is known as a natural rate shock. Characterize graphically the effect in period 1 on consumption of non-tradables, unemployment, the relative price of non-tradables, and the real wage measured in units of tradable goods under two alternative monetary policy regimes: A. A fixed exchange rate regime. B. A floating exchange rate regime in which the central bank pursues full employment and price stability.

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter15: Macroeconomic Viewpoints: New Keynesian, Monetarist, And New Classical

Section: Chapter Questions

Problem 13E

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