1H1 - (c Explain carefully what is exogenous variable[2(d...

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Econ. 102. Homework 1. Due: 2/22/10. (Honor the due date) According to Mankiw To understand the economy, economists use models –theories that simplify reality in order to reveal how exogenous variables influence endogenous variables . The art in the science of economics is in judging whether a model captures the important economic relationships for the matter at hand . Because no single model can answer all questions, macroeconomists use different models to look at different issues. *******. 1. Show your calculation explicitly. 2. Use the ruler to draw graphs. (Also show the scale explicitly). Otherwise only partial credit will be given *******. Given the short-run AD-AS model (1) Y d = 135 – 5p (AD) (2) Y s = - 30 + 10p (SRAS) (3) Y d = Y s = Y (equilibrium) where Y d = aggregate quantity demanded of RGDP, Y s = aggregate quantity supplied of RGDP, p = general price (GDP deflator or CPI). (a) Explain carefully what is endogenous variable? [2] (b) List all endogenous variables in this model. [2]
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Unformatted text preview: (c) Explain carefully what is exogenous variable? [2] (d) List all exogenous variables in this model. [2] Equilibrium Analysis (e) Find equilibrium value of general price (p*) and RGDP (Y*). [2] (f) Show the model and the solution graphically. [5] (g) Assume that the potential GDP (Y f ) = 100. Plot this LRAS curve to your graph in (f). Is this economy facing a recessionary or inflationary gap? Explain your answer. [2] Comparative Static Analysis (h) Explain carefully what is comparative static analysis? [3] (i) Use the economic model we can show how changes in exogenous variables affect the endogenous variables. For fiscal stimulus, the government increases spending, and rises AD from 135 to 165 when p = 0. Find new equilibrium value of general price (p**) and RGDP (Y**). [4] (j) Show your answer in (i) graphically. [4] (k) What is the effect of an increase in government spending on general price (p) and RGDP(Y)? [2]...
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