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Unformatted text preview: 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) we allow prices to be flexible and in part (b) we allow real output to respond to changes...
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This note was uploaded on 08/01/2008 for the course ECON 182 taught by Professor Kasa during the Spring '08 term at University of California, Berkeley.
 Spring '08
 Kasa
 Economics

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