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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
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
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This note was uploaded on 09/29/2010 for the course ECON 202 taught by Professor Ravenna,f during the Winter '08 term at University of California, Santa Cruz.
 Winter '08
 Ravenna,F

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