Shock Reactions

Question 1

Supply shock pos (temp and perm)

Answer 1

Temporary:
0) π decreases
1) r decreases (Auf IS) -> y increases -> y1>ye -> π increases. back on MR
2) r increases, y decreases, y1>ye -> π increases
Until back to blisspoint

If permanent:

0) add: new MR
1) add: economy on new MR
2) add: ye> ye’, πT = πT, rs > rs’

Question 2

Supply shock negative (Temp and perm)

Answer 2

Temporary:
0) π increases
1) r increases (Auf IS) -> y decreases -> y1 π decreases. back on MR
2) y increases, y1 π decreases, r decreases
Until back to blisspoint

If permanent:

0) add: new MR
1) add: economy on new MR
2) add: ye>ye’, πT = πT, rs < rs’

Question 3

Demand Shock positive (Temp and perm)

Answer 3

Temp
0) IS - IS’, π increases, y increases
1) r increases, y decreases, π decreases, back on IS
2) r decreases, y increases, π decreases (y1rs
πT and ye stay the same

0) π decreases
1) r decreases (Auf IS) -> y increases -> y1>ye -> π increases. back on MR
2) r increases, y decreases, y1>ye -> π increases
Until back to blisspoint

If permanent:

0) add: new MR
1) add: economy on new MR
2) add: ye> ye’, πT = πT, rs > rs’

Question 4

Demand Shock negative (Temp and perm)

Answer 4

Temp
0) IS - IS’, π decreases, y decreases, r decreases
1) r decreases, y increases, π increases (y1>ye), back on IS & MR
2) r decreases, y increases, π increases, slowly up IS and MR until equilibrium
End: rs’ y increases -> y1>ye -> π increases. back on MR, stays on IS’
2) r increases, y decreases, y1>ye -> π increases
Until back to blisspoint
End: rs’