ans_practice_mid

ans_practice_mid - ECON110B Summer II 2007 Professor Dong...

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1 ECON110B Summer II 2007 Professor Dong Heon Kim Answer key for Practice Mid-term PART A: CONCEPT AND KNOWLEDGE A1.a . Expected present discounted value It is the value today of the expected sequence of future payments. A1.b . Yield to maturity It is constant interest rate that makes the bond price today equal to the present value of future payments on the bond. A1.c . Consumption smoothing Regardless of whether the increase in income occurs in the current period or the future period, the forward-looking consumer spreads it over consumption in both periods to make consumption smooth. A.2. i) In the short run: The higher rate of growth of nominal money leads to an increase in the real money stock ( M/P ) because the faster increase in nominal money will not be matched by an equal increase in the price level. The increase in the real money stock causes a shift in the LM curve down. For a given level of output, the increase in the real money stock leads to a decrease in the nominal interest rate. If we assume that people and firms do not revise their expectations of inflation immediately, the IS curve does not shift. Given expected inflation, a given nominal interest rate corresponds to the same real interest rate and to the same level of spending and output. The economy moves down the IS curve and thus, output is higher, the nominal interest rate is lower, and given expected inflation, so is the real interest rate. ii) In the medium run:
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This note was uploaded on 09/18/2008 for the course ECON 100B taught by Professor Rauch during the Winter '07 term at UCSD.

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ans_practice_mid - ECON110B Summer II 2007 Professor Dong...

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