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
LMcurve 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 LMcurve.
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
IScurve and ADcurve right. In a shortrun 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) LMcurve 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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View Full DocumentPart 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, IScurve shifts to left by
1
1
c
1
M
c
0
.
2. Due to the shift of IScurve, the interest rate decreases. This increases investment, which is determined
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 Winter '08
 Serra
 Economics, Macroeconomics, Inflation, Supply And Demand, li, money demand, LMcurve

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