ss6 - University of Toronto Macroeconomics, Theory and...

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University of Toronto Macroeconomics, Theory and policy Masoud Anjomshoa Economics Department Solution set #6 Disclaimer: These solutions are just guidelines for you, and may NOT include a complete solution for the questions and problems in your homework, as you must present in your assignments and/or exams. In your solutions you must show your work, and demonstrate your line of thinking clearly. Please, always check my calculations for unintentional typos or miscalculations. --------------------------------------------------------------------------------------------------------------------------------- 1)- An increase in the oil price causes a jump in the price level. LM curve shifts up from LM1 to LM2 due to the increase in price level ( equilibrium moves from A to B). As a result the interest rate goes up, because when price goes up supply of real balances (real money), goes down, and people sell their bonds to collect more money, which leads to lower price of bonds, or higher interest rate. Given higher
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