Macroeconomics, Econ 202, Review Questions
Winter 2010
1. Consider the basic shortrun 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 fullemployment 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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 Winter '08
 Ravenna,F
 Economics, Monetary Policy

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