ps6 - University of Toronto Economics Department...

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University of Toronto Macroeconomics, Theory and policy Masoud Anjomshoa Economics Department Assignment #6 1- Consider an economy that has been in equilibrium for a long time, so its IS and LM curves are intersecting each other at “potential output” level, Ybar. Also, suppose in this economy, investment is ONLY a function of the interest rate (not a function of income, Y). Just during the previous week, the cartel of oil exporting countries, OPEC, has decided to cut the level of oil production, which has led to a sharp increase in international price of oil, and in turn, domestic price of fuel, electricity, transportation, and finally the overall price level, P. a)- By drawing the IS and LM curves and potential output in a set of i-Y coordinates, show the before and after shock short run equilibrium points, and explain how and why Y, C, I, and i change after the shock. Make sure you write the reasons behind any change. b)- Using the dynamics of movements of the IS/LM curves, why may we expect to see a sharp jump in interest
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This note was uploaded on 10/08/2011 for the course ECO 202 taught by Professor Anjomshoa during the Fall '08 term at University of Toronto.

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