Question

) Spartanville is a small country off the coast of Western Canada that relies heavily on the extraction of artisia, a cheap metal that is an input to production for many Spartanville products. This year, Spartanville has seen extended blizzard conditions followed by heavy flooding when the snow melted; making artisia nearly impossible to mine.

+Assume that the initial level of spending growth is 8%.

+Also assume that prior to the blizzards, Spartanville was at an equilibrium inflation rate of 4%.

13. What is the long run economic growth rate before the blizzards occurred?

14. In the New Keynesian model, what is the general effect on inflation, short run, and long run economic growth in this problem? Draw a (legible) diagram to show what happens if the Fed does not respond to the shock.

15. Assume the long run rate of growth fell to -1%. What is the new inflation rate if there is no change in velocity and no action by the Fed?

Answer 1

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