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Unformatted text preview: Econ 202, Winter 2010 Problem set 2 Due: Tuesday January 26 1. The basic short run model of the text book takes the form ~ Y t = & a & & b ( R t & & r ) R t & & r = & m ( & t & &) & t = & t & 1 + & v ~ Y t (a) Brie&y explain in words what each equation represents. (b) Derive the aggregate demand curve. What is its slope? Does an increase in & m make the AD curve steeper or &atter? Why? 2. To better capture the delay between changes in interest rates and e/ects on aggegate spending, suppose the basic model is modti¡ed to take the form ~ Y t = & a & & b ( R t & 1 & & r ) R t & & r = & m ( & t & &) & t = & t & 1 + & v ~ Y t + & o t (a) Derive the AD curve. (b) Suppose & a = 0 : 01 , & b = 0 : 75 , & r = 0 : 01 , & m = 0 : 5 , & = 0 : 01 , and & v = 0 : 4 . If this economy starts out with ~ Y t = 0 and & o t = 0 , what is R t & 1 , & t , and R t ? (c) Now suppose & o t +1 = 0 : 05 and then returns to for t + 2 , t + 3 , ..... Plot the response of the output gap, in&ation, and the real interest rate for periods t + 1 to t + 40 (use a spreadsheet such as excel to do this ¢don£t do it by hand).this ¢don£t do it by hand)....
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- Winter '08
- Inflation, output gap, in‡ ation, b5 Yt