AnswerKey for TERM TEST 2 PART B FALL 2010

AnswerKey for TERM TEST 2 PART B FALL 2010 - Economics 3H03...

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Economics 3H03 Fall 2010 Term Test 2 Solutions November 10, 2010 (Prof. Krishnakali SenGupta) 1. (1a) (3 marks) Same answer in all three versions of the test. Proper notation was important. Money market equilibrium. M P A = L ( i A ) Y A M P B = L ( i B ) Y B Foreign exchange market equilibrium equation. i A |{z} DR = i B |{z} FR + E e A/B - E A/B E A/B (1b) (4 marks) See graphs at the end. It was important to understand from the question if the coun- try is implementing an expansionary monetary policy (Version 1) or a contractionary monetary one (Version 2). In Version 3, country B was implementing a contractionary monetary policy, but the graphs where for country A. 1 mark was taken off if the wrong (opposite) policy was identified from the one in the question, but the graphs were still consistent with the identified one. Furthermore, policy was permanent with short and long run in versions 1,2. In Version 3 it was temporary and permanent in the short run only. Proper labelling of graphs and curves was necessary for full marks.
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