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f01_ps3 - Problem Set 3 1. Answer by True, Uncertain or...

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Problem Set 3 1. Answer by True, Uncertain or False. Explain your answer with a graph or analytically. a. A fiscal expansion must increase consumption, output and investment. b. A fiscal expansion coupled with a monetary expansion causes both output and the interest rate to raise. c. Assume that Investment spending depends only on the interest rate, and not on output, and then a decrease in the budget deficit will cause investment spending to increase. d. In an economy with financial intermediaries (banks), the Central Bank has a greater ability (the economic term would be “discretion”) in moving the LM. 2. Consider the following Good Market model, where we have assumed a linear form for the investment. Y = C+ I+ G C = c 0 + c 1 (Y- T) I = d 0 Y – d 1 i a. Interpret the two parameters d 0 and d 1 . Solve for the equilibrium output in the good market. b. Now you have the IS schedule. Show its slope in the i-Y space. c. How does the slope depend on d 1 ? Give an economic interpretation. Now assume that the money demand is the following (here P=1): YL(i) = eY –fi To be in equilibrium the money supply, M, must be equal to money demand. a. Interpret the two parameters e and f . b.
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This note was uploaded on 11/29/2009 for the course 14 14.02 taught by Professor Geurrieri during the Fall '09 term at MIT.

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f01_ps3 - Problem Set 3 1. Answer by True, Uncertain or...

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