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202_final_w09 - Macroeconomics Econ 202 Final Exam...

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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 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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