ECON 200 Problem Set 6 Solutions Fall 2007

# ECON 200 Problem Set 6 Solutions Fall 2007 - Economics 200...

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Economics 200 Macroeconomic Theory Solutions to Problem Set 6 1. (a) The autonomous spending multiplier is given by . Here and 5 so the " ",Ð">Ñ ,œÞ& >œÞ multiplier is . "" % "Þ&Ð"Þ Ñ Þ(& \$ 5 œœ (b) The IS curve is the set of pairs such that the goods market clears. Thus Ð<ß ] Ñ ] œ #!!  Þ&Ð]  Þ&] Ñ  \$!!  "!! œ '!!  Þ#&]  "&!< XK G M èëëëëëëëéëëëëëëëê å èëëéëëê å  "&!< so that or . Þ(&] œ '!!  "&!< ] œ )!!  #!!< (c) The LM curve is the set of pairs such that the money market clears. Thus Ð<ß ] Ñ %!! " œ ]  #!!< ] œ %!!  #!!< or . (d) Short-run equilibrium occurs when both the goods and money markets clear. Thus )!!  #!!< œ %!!  #!!< Ê < œ " ] œ '!! Ð"ß '!!Ñ and so the pair is . 2. This observation implies that money demand does not depend on the interest rate. If ˆ‰ Q Q T T H !! œPÐ]Ñ ] , there is just one value of GDP, say , satisfying , that gives money market equilibrium. This means that the LM curve is vertical at so shifts in the IS curve, due, ] !

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## This note was uploaded on 04/26/2010 for the course ECON 101 taught by Professor Staff during the Spring '08 term at Vassar.

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ECON 200 Problem Set 6 Solutions Fall 2007 - Economics 200...

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