AK_2M2004

# AK_2M2004 - Sketch for the answer of 2004 2nd Midterm1 Feb...

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Sketch for the answer of 2004 2nd Midterm 1 Feb. 26th 2007 Part A 1. Skip 2. False: The saving rate a/ects the growth rate (recall the case that the marginal productivity of capital on capital per e/ective labor is constant). 3. False: Suppose the money demand function takes the following form: M P = l 0 l i r + l Y Y The larger l Y implies the more sensitive money demand with respect to the income. Note that we can obtain LM-curve as follows: r = l 0 l i + l Y l i Y M l i P where M is money supply Hence, higher l Y gives steeper LM-curve. output level is not a/ected by the governmental spending although the levels of interest rate and price are a/ected. This result can be explained in the following way: First, a positive IS shock (e.g., M G > 0 ) shifts IS-curve and AD-curve right. In a short-run equilibrium, the output level becomes higher. Then, over time, the price level gradually rises, which causes (i) SRAS to move up, (ii) M P to decrease, and (iii) LM-curve to move up. (1) G increases SRAS LRAS (4) P increases Y Y Y P r M/P r (2) IS shifts (3) AD shifts SRAS (5)-(i ) (5)-(i) (5)-(i i) 5. Skip 1 This memorandum is a sketch for the answer of 2004 2nd midterm and not a suggested answer keys. It may contain several typos and mistakes. 1

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Part B 1. Recall the Keynesian cross: Y = c 0 + c 1 Y + I ( r ) + G ) Y = 1 1 c 1 c 0 + 1 1 c 1 I ( r ) + 1 1 c 1 G If c 0 decreases, IS-curve shifts to left by 1 1 c 1 M c 0 . 2. Due to the shift of IS-curve, the interest rate decreases. This increases investment, which is determined
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AK_2M2004 - Sketch for the answer of 2004 2nd Midterm1 Feb...

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