# Inflation shock

How do I do all the questions in Exercise 5.1?Read the inflation shock example in Jones textbook (event 1), Section 13.5. Supposethe size of the shock is o0. Remember that the initial values for inflation and short-runoutput are 0 = and e Y0 = 0. The first two questions correspond to what was done inclass, with o denoted by o0.1. What is initial response of inflation 1 and initial output as e Y1 to the oil priceshock? Hint: the (AS) curve at time t = 1 is 1 = + Y1 + o0.2. Calculate inflation at time t t as a function of time t and the parameters of themodel. Calculate short-run output at time t e Yt as a function of time t and theparameters of the model.3. Now suppose the parameters of the (AS) and (AD) curves take the following values.The size of the oil price shock is given by o0 = 10%. The aggregate demand shockis set to a = 0. The response of investment to interest rates is such that b = 1/2.The monetary policy rule parameter is given by m = 1/2. Finally, = 1/2, and = 2%. Graph the value for inflation t and for short run output e Yt as a functionof time, for t = 0, 1, 2, 3, …, 29, 30.4. Now assume that monetary policy is more agressive, with m = 5, with all otherparameters unchanged. Graph the value for inflation t and for short run outpute Yt as a function of time, for t = 0, 1, 2, 3, …, 29, 30.5. Comment briefly on your results.

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