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IS-MP + Phillips Curve (Case C). Imagine that, due to the lockdown, consumption demand by households decreases generating a drop in c. Assume that this shock happens at t=3 and only lasts one period. 1. Analyze graphically, using the IS-MP and the Phillips curve, what happens to short-run output and inflation at t=3, for each of the following > cases: a) (5 points) The Central Bank keeps the interest rate at the long-run level . b) (5 points) The Central Bank decreases the interest rate at t=3. 2. Now, show what would happen to: the interest rate (rt), short-run output (t), and inflation (Tt) over time. You must show what happens for each of the cases: a) (5 points) Assume Central Bank keeps the rate at for all periods. b) (5 points) Assume Central Bank decreases the rate only at t=3 (it goes back to at t=4,5). o You should show what each of the variables is at each period from t=1 to t=5. o For this question assume that before the shock (t=1,2): the interest rate was at its long-run level (r+ = T), output at its potential ( Yt Y_), and inflation was 5% (7= 5%). o You should provide qualitative answers similarly to the problem set (no numerical calculations needed). = = IS-MP + Phillips Curve (Case C). Imagine that, due to the lockdown, consumption demand by households decreases generating a drop in c. Assume that this shock happens at t=3 and only lasts one period. 1. Analyze graphically, using the IS-MP and the Phillips curve, what happens to short-run output and inflation at t=3, for each of the following > cases: a) (5 points) The Central Bank keeps the interest rate at the long-run level . b) (5 points) The Central Bank decreases the interest rate at t=3. 2. Now, show what would happen to: the interest rate (rt), short-run output (t), and inflation (Tt) over time. You must show what happens for each of the cases: a) (5 points) Assume Central Bank keeps the rate at for all periods. b) (5 points) Assume Central Bank decreases the rate only at t=3 (it goes back to at t=4,5). o You should show what each of the variables is at each period from t=1 to t=5. o For this question assume that before the shock (t=1,2): the interest rate was at its long-run level (r+ = T), output at its potential ( Yt Y_), and inflation was 5% (7= 5%). o You should provide qualitative answers similarly to the problem set (no numerical calculations needed). = =

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