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Unformatted text preview: Economics 420  Spring 2010 Mike Aguilar Intermediate Theory: Money, Income & Employment UNC at Chapel Hill Exam 2, Mar 31st 2010 Instructions : Please explain your answers thoroughly and show all necessary work. State your assumptions carefully. There may be more than one correct solution. The honor code is in effect. Note: Maintain a ceteris paribus assumption when interpreting all shocks. 1. (5pts) Consider a central bank that adhered to the following rule: i t = t + + ( t * t )+ Y ( Y t Y t ). (Note: you can visit question 6 for parameter definitions.) Upon which parameter would a monetary hawk focus? Upon which would a monetary dove focus? Answer: Hawks are tough on inflation and therefore would have a high . Doves focus on the economy, and therefore would have a high Y . 2. (5pts) What is the current unemployment rate? How was this rate impacted by the recent storms along the East Coast, referred to as Snowmagedon? Provides examples of which industries are adding jobs and which are cutting jobs? Answer: The current unemploymnt rate is 9 . 7%. The snow fall had surprisingly little impact. Manufacturing and services are among the best industries, and construction is among the worst. 3. (30pts) Consider a closed economy. Suppose there is a housing bust, i.e. a significant drop in the purchase of new homes. (a) (7pts) Consider a Keynesian Model. Illustrate graphically and explain the short run effect of the housing shock using the IS/LM diagram. (b) (7pts) Consider again a Keynesian Model. Illustrate graphically and explain the short run effect of the housing shock using the AS/AD diagram. Be sure to redraw the IS/LM diagram from part a) to reflect any changes caused by the movements in AS/AD space. (c) (6pts) Consider again a Keynesian Model. Illustrate graphically and explain the long run effect of the housing shock using the AS/AD diagram. 1 (d) (6pts) Consider now a New Classical model. Illustrate graphically and explain the effect of the housing shock using the AS/AD diagram. (e) (4pts) Compare the effect of the shocks on the equilibrium Y * and r * of the Keyesian model and the New Classical model in both the short and long run. Answer: (a) The housing bust lowers the investment for each interest rate level. The IS curve will shift leftwards. The LM curve will be the same. Y r IS 1 IS 2 LM Question 3.a) Y r IS 1 IS 2 LM 1 Y P AD 1 AD 2 SRAS Question 3.b) M r L(r,Y 1) L(r,Y 2) Ms/P 1 Ms/P 2 LM 2 A B C A B C A B C Movement: A>B>C (b) For each price level, the output implied by IS and LM equilibrium is lower. Thus, the AD curve will shift leftwards. The SRAS curve remains unchanged in the short run. Notice though that due to the relative slopes of the SRAS and AD curves, the magnitude of 2 the change in equilbrium output is not equal to the magnitude of the shift in AD. Thethe change in equilbrium output is not equal to the magnitude of the shift in AD....
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This note was uploaded on 11/02/2010 for the course ECON 420 taught by Professor Hill during the Spring '08 term at UNC.
 Spring '08
 Hill
 Economics

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