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Econ 202, Winter 2010
Problem set 3.
Due: Tuesday February 18.
1. Using the basic shortrun model of the text, what is the e/ect of a
perma
nent
(a) Assume the central bank does not change its policy rule and that the
.
Explain how the economy eventually returns to a zero output gap
.
(b) If the the central bank whats to prevent a ±scal expansion from hav
policy rule?
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
o
plus a policy rule that speci±es the behavior of
R
t
. Suppose, however,
that the central bank²s policy rate
R
s
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
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 Winter '08
 Ravenna,F

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