ECON 303 Assignment 3 Solutions.pdf - Problem Set 3 with...

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Problem Set 3 with Suggested SolutionsECON 303: Intermediate Economic TheoryMacroeconomics I (Spring 2019)Instructor: Aamir Ra°que Hashmi1. [Blanchard and Johnson (2015), pp.104±105, question 3] Consider °rst thegoods market model with constant investment:C=c0+c1(Y°T)andI,GandTare given.(a) Solve for equilibrium output. What is the value of the multiplier?
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(b) Now, let investment depend on both sales and the interest rate:I=b0+b1Y°b2i:Solve for equilibrium output. At a given interest rate, is the e/ect of changein autonomous spending bigger that what it was in(a)? Why? (Assumec1+b1<1).
(c) Next, let us introduce the °nancial market equilibrium condition with realmoney demand equal to real money supply.
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Solve for equilibrium output.(Hint:Eliminate the interest rate in theISequation using the expression from theLMequation.)Derive themultiplier (the e/ect of a one-unit change inb0on output).
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