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202_REVIEW_w10

202_REVIEW_w10 - Macroeconomics Econ 202 Review Questions...

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Macroeconomics, Econ 202, Review Questions Winter 2010 1. Consider the basic short-run model of the textbook: ~ Y t = b ( R t r ) : IS curve t = t 1 v ~ Y t : Phillips curve R t r m ( t : Monetary policy Suppose the economy is initially at a full-employment equilibrium with ~ Y = 0 and . Now suppose to & 0 < . Carefully discuss the adjustment of the economy in response to this change. 2. The basic short run model of the text book takes the form ~ Y t a b ( R t r ) t = t 1 v ~ Y t plus a policy rule that speci±es the behavior of R t . Suppose, however, that the central bank²s policy rate i t is related to the interest rate that appears in the IS relationship R t according to R t = R s t p , where p is a mean zero shock to the risk premium. Policy is described by R s t r m ( t . (1) (a) Derive the aggregate demand curve linking ~ Y t and t . How is it a/ected by a positive realization of p ? (i.e., is it shifted to the left or right?) (b) Assume a = 0 but suppose p takes on a positive value (assume it remains permanently at this positive value). Describe the adjustment of the economy to such a shock. (Assume the economy starts out at ~ Y = 0 and .) (c) Instead of (1), assume the central bank follows the policy rule given by R s t r m ( t p . (2) What happens now if p takes on a positive value? How does your answer di/er from that of part

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202_REVIEW_w10 - Macroeconomics Econ 202 Review Questions...

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