202_ps4ans_w10

# 202_ps4ans_w10 - Econ 202 Winter 2010 Problem set 4 Answers...

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Econ 202, Winter 2010 Problem set 4: Answers. 1. The basic short run model of the text book takes the form ˜ Y t = ¯ b ( R t ¯ r ) π t = π t 1 v ˜ Y t plus a policy rule that speci f es the behavior of R t . Suppose, however, that the central bank’s 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 ,( 1 ) where ¯ p is a mean zero shock to the risk premium. Policy is described by R s t r m ( π t ¯ π ) ¯ p .( 2 ) The nominal policy interest rate is related to the real interest rate by i t = R t + π t (3) (a) Derive the aggregate demand curve linking ˜ Y t and π t . How is it a f ected by a positive realization of ¯ p ? (i.e., is it shifted to the left or right?) The AD curve is ˜ Y t = ¯ b ( R t ¯ r )= ¯ b ( R s t p ¯ r ) = ¯ b r m ( π t ¯ π ) ¯ p p ¯ r ] = ¯ b ¯ m ( π t ¯ π ) which is independent of ¯ p —soanon ze ro ¯ p does not shift the AD curve because the central bank adjusts interest rates to o

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202_ps4ans_w10 - Econ 202 Winter 2010 Problem set 4 Answers...

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