Econ420S10_HW8_Solution

Econ420S10_HW8_Solut - Economics 420 Spring 2010 Mike Aguilar Intermediate Theory Money Income& Employment UNC at Chapel Hill HW 8 Due

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Unformatted text preview: Economics 420 - Spring 2010 Mike Aguilar Intermediate Theory: Money, Income & Employment UNC at Chapel Hill HW # 8 Due - 04/12/2010 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. (6pts) Consider the Mundell-Fleming model. (a) Derive the value of income that simultaneously balances the goods & services and money markets. Denote this value as Y * . (b) Discuss how Y * varies with an appreciation of the US dollar. (Note: ignore the changes that are associated with the BoP.) Answer: (a) From the lecture notes, the IS curve is: r = 1 c + i i ( a + ¯ I + G- bT + x + x 1 Y f- x 2 1 e P- z + z 2 eP f )- 1- b + z 1 c + i 1 Y The LM curve is the same as in Keyesian model, note that the real money supply M = M s /P : r = 1 c 2 ( c- M s P ) + c 1 c 2 Y Solve for the equilibrium Y: 1 c + i i ( a + ¯ I + G- bT + x + x 1 Y f- x 2 1 e P- z + z 2 eP f )- 1- b + z 1 c + i 1 Y = 1 c 2 ( c- M s P )+ c 1 c 2 Y ( c 1 c 2 + 1- b + z 1 c + i 1 ) Y = 1 c + i i ( a + ¯ I + G- bT + x + x 1 Y f- x 2 1 e P- z + z 2 eP f...
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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.

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Econ420S10_HW8_Solut - Economics 420 Spring 2010 Mike Aguilar Intermediate Theory Money Income& Employment UNC at Chapel Hill HW 8 Due

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