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Assignment 2

# Assignment 2 - ECON 202 Tutorial Assignment 2 2010 To be...

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ECON 202: Tutorial Assignment 2, 2010 To be discussed in tutorials in the week beginning Monday 2 nd August. This assignment WILL BE GRADED . Hand in your answers to your tutor’s box on the Mezzanine Floor of Rutherford House by 10:30am on Monday 2 nd August . Question 1: The IS/LM model. (6 marks) Consider an economy in which the price level does not change over time and so the real interest rate is equal to the nominal interest rate. The demand for goods is given by: Z = a 0 + a 1 Y – a 2 i while the demand for real money balances is given by: (M/P) d = b 1 Y – b 2 i. The supply of real money balances is given by M/P. The parameters of the model, (a 0 , a 1 , a 2 , b 1 , b 2 , M/P), are all assumed to be positive. (a) Find the equilibrium level of output for this economy. Hint: For the IS curve, solve for i as a function of Y (taking into account that Z = Y), and for the LM curve, solve for i as a function of Y (and M/P). From these two equations, solve for the equilibrium value of Y (where the IS and LM curves intersect). You should end up
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