Chapter 2

Question 1

A positive demand shock leads away from the equilibrium to ->

Answer 1

… higher employment and a rise in inflation

Question 2

A negative demand shock leads away from the equilibrium to ->

Answer 2

… lower employment and lower inflation.

Question 3

Philips Curve equation

Adaptive Philips Curve equation

Answer 3

πt = πt^E + a (yt-ye)
πt = πt-1 + a (yt-ye)

πt-1 lagged inflation
a (yt-ye) = output gap