Econ102SQ6Spring2007

Econ102SQ6Spring2007 - UCLA Prof. E. McDevitt Economics 102...

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UCLA Prof. E. McDevitt Economics 102 STUDY QUESTIONS-SET #6 1. Derive the AD curve from the IS-LM model. Prove that (a) a temporary increase in G causes the AD curve to shift to the right, and (b) a decrease in the expected inflation rate causes the AD curve to shift to the left. 2. Using the AS-AD graph, analyze the impact on the price level and real output for each of the following cases. Give both the classical and Keynesian (short run and long run) versions. a. a temporary decrease in G. b. an increase in the nominal money supply. c. a temporary positive supply shock. 3. Evaluate each statement below: a. The imperfect-information model implies that money supply increases can have real effects in the classical model. b. An implication of rational expectations theory is that when government policy makers act in systematic, predictable ways, government policy is less likely to have real effects on the economy. c. If information on the money supply and prices are quickly and readily available, then the imperfect-information model combined with rational expectations implies that an unanticipated AD shock should have a very short-lived impact on real output. Thus, a recession induced by an unanticipated drop in AD should be short lived. This seems to be contrary to the evidence. 4. Analyze the effects on the price level and real output for each of the following cases. Assume a classical model with imperfect information. a. An increase in the expected price level, with no change in AD. b. An unanticipated decline in the money supply. c. A perfectly anticipated decline in the money supply. CLASSICAL SMALL- OPEN ECONOMY 1. What is the goods market equilibrium condition in an open economy? 2. What is net foreign investment and what is its relationship to net exports (the trade balance)? In what sense do economists use the term "lending" when discussing net foreign lending? 3. Why must the domestic real rate of interest in a small open economy with perfect capital mobility be equal to the world real rate of interest? 4. For each question below, describe the impact on domestic national saving, domestic investment, the trade balance (NX) and net foreign investment. Assume a small open economy in which there is initially a trade deficit. Use graphs to justify your answer. a. a temporary positive supply shock. b. a decrease in expected future income (Y 2 ). c. a permanent increase in productivity (A) (assume that the domestic savings curve does not shift). d. a temporary decrease in government spending. e. a tax cut, holding G constant. Assume that Ricardian equivalence holds. f. answer (e) under the assumption that Ricardian equivalence does not hold. What does your answer to this question suggest about the relationship between budget deficits and trade balances? g. A large temporary increase in
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This note was uploaded on 12/11/2009 for the course ECON 180364203 taught by Professor Edwardmcdevitt during the Spring '09 term at UCLA.

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Econ102SQ6Spring2007 - UCLA Prof. E. McDevitt Economics 102...

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