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Unformatted text preview: Economics 420 - Spring 2010 Mike Aguilar Intermediate Theory: Money, Income & Employment UNC at Chapel Hill HW # 6 Due - 03/22/2010 Instructions : Please explain your answers thoroughly and show all necessary work. State your assumptions carefully. There may be more than one correct solution. Please type your answers whenever possible. Students may work together, but each must submit their own work. The honor code is in effect. Note: Maintain a ceteris paribus assumption when interpreting all shocks. 1. (5pts) Consider a Keynesian economy, where the short run aggregate supply curve is: Y = Y + ( P- P e ) + v If there is a positive supply shock, i.e. v > 0, analyze the short run effect of the shock using the Keynesian model: (a) Illustrate graphically how the supply shock affects the SRAS curve. (b) Will the supply shock affect money supply, money demand and LM curves? If yes, explain and illustrate graphically. If not, explain why. (c) Will the supply shock affect IS curve? If yes, explain and illustrate graphically. If not, explain why. (d) Will the supply shock affect the AD curve? If yes, explain and illustrate graphically. If not, explain why. Answer: (a) A positive shock on the supply raises the output level for each price level. Thus the SRAS curve will shift rightwards. For a given AD curve, the price will fall and the output will rise. (b) The decrease in Prices and increase in output can be reflected by movements in the supply and demand for real money balances, respectively. The combined effect would push the LM curve outward to accomodate the high erlevel of equilibrium output....
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- Spring '08