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Unformatted text preview: P 1 P 2 : ANSWER: As we derived in class P 2 P 1 = (1 & a ) e 11 +(1 & b ) e 21 ae 12 + be 22 : Here we have a = 1 = 2 and b = 1 = 3 : So, substituting these parameters and endowments into above equation we obtain P 2 P 1 = 1 = 2 1+2 = 3 3 1 = 2 2+1 = 3 4 = 15 = 14 1 PROBLEM #4 : You know now that monetary policy is neutral. Federal Reserve knows it too. However, it is trying now to use monetary policy to stimulate the econ-omy. How would you reconcile this apparent contradic-tion? Do you think that FED is going to be successful in stimulating the economy? ANSWER: Indeed, FED is not going to be successful in stimulating the economy since monetary policy is neutral. However, there is a strong public pressure on Federal Reserve simply to do something to prevent a recession. That is why Federal Reserve acts as it does. 2...
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- Spring '08