York University
Department of Economics
Faculty of Liberal Arts and Professional Studies
AP / ECON 2450 M
Intermediate Macroeconomic Theory II
Tasso Adamopoulos
Assignment 3
Duration: 2 ½
hours
Question 1
(
26 marks
)
Consider an economy in which the components of aggregate expenditure are
given by the following equations:
C = C
0
+ C
y
(1t)Y
I = I
0
– I
r
r
G = G
0
NX = X
F
Y
F
+ X
ε
– IM
y
Y
The real exchange rate is given by:
=
0
–
r
(rr
F
)
Potential output is produced according to:
Y
*
= F(K,E L
*
)
The demand for real money balances is given by:
M
D
/P = Y/V
L
[V
0
+ V
i
(r +
π
e
)]
Okun’s law is described by the following equation:
u – u
*
= 0.6(YY
*
)/Y
*
The aggregate supply side of the economy behaves according to:
(YY
*
)/Y
*
=
θ
(PP
e
)/P
e
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(
6 marks
) Derive the planned expenditure line. Using the planned
expenditure line, derive the economy’s IS curve. Derive the economy’s LM
curve.
(b)
(
4 marks
) Derive the economy’s aggregate demand curve and explain
what it describes.
(c)
(
4 marks
) Assume now that the central bank conducts its monetary
policy according to the following Taylor Rule:
r = r
*
+
φ
’’(
π
–
π
’)
Derive the economy’s Monetary Policy Reaction Function (MPRF) as a
relationship between the price level and real GDP.
(d)
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 Winter '09
 TASSO
 Economics, Macroeconomics, Inflation

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