Department of Economics
University of California, Berkeley
Spring 2006
Economics 182
Problem Set 2
Due in class on Thursday, February 23.
To be handed at the beginning of lecture
.
Please write your name, GSI name and section time in your problem set.
Problem 1
In lecture we studied the effect of an unexpected permanent increase in the money
supply on the money and foreign exchange markets and we analyzed the adjustment
of the variables of the model over time.
However, we did not study the behavior of
the expected real
interest rate
r
.
Describe how
r
evolves over time after the shock.
Present the evolution of
r
and the nominal interest rate
i
in a graph. Assuming that
r
is positive before the shock, can it become negative after the shock?
Problem 2
Suppose there is a permanent decrease in the U.S. money supply. Trace the shortrun
and longrun effects on the current and expected exchange rate, interest rate, and price
level. Draw the twosided diagram to help explain your answer. Also draw the time
paths of each of these variables. (We assume the economy starts with all variables at
their longrun levels and that output remains constant as the economy adjusts to the
money change, i.e. real output Y is given.)
Problem 3
In our discussion of shortrun exchange rate overshooting, we assumed that real output
and prices were given. We will now relax these assumptions one at a time
: in part (a)
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '08
 Kasa
 Economics, Exchange Rate, Inflation

Click to edit the document details