Macroeconomics, Econ 202, Final Exam
March 18, 2009
Instructions. Do both parts
.
PART I. . Answer both questions in this part.
1. 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 bank±s policy
rate
i
t
is related to the interest rate that appears in the IS relationship
R
t
according to
R
t
=
i
t
+ °
p
,
where
°
p
is a mean zero shock to the risk premium. Policy is described by
i
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
i
t
= °
r
+ °
m
(
°
t
°
°
)
°
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 Winter '08
 Ravenna,F
 Economics, Macroeconomics, Inflation, Monetary Policy

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