all equations used are based on Dr. Ho Kong Weng's EC3152 lectures (AY 2003/2004)
further improvements (e.g. custom settings, etc.) on this applet will be done if I have time and if people would deem this as helpful
any questions or comments: [email protected]
Option Descriptions
A: Permanent positive demand shock or policy change (nominal GDP growth rate increased from 5% to 10% as can be seen from the upward shift of the horizontal CY line); Expectations are set as simple adaptive (expected inflation = inflation last period); Slope of SP line is set to 1;
B: Basically the same as Option A but with a flatter slope (0.3); Purpose is to show that a flatter slope of the SP line leads to greater deviation from natural GDP and a longer time to long run equilibrium;
C: Almost the same as Option A except that expectations are rational; Must take note that the demand shock is unanticipated and thus rational expectations will take effect after the first period; Notice that the time to reach long run equilibrium is shorter than when expectations were adaptive (Argument for Cold Turkey approach to deflation? What do you think?);
D: Simple adaptive expectations with temporary adverse supply shock (3-period shock); Neutral policy;
E: Rational expectations under an unanticipated temporary adverse supply shock (3-period shock); Neutral policy;
F: Unanticipated permanent adverse supply shock with expectations set to rational