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Unformatted text preview: M/P. Explain the effects of expansionary monetary policy using your results
3. Problem 3, Chapter 5 of Blanchard, p. 106.
4. Use the model of Problem 3 to answer this question.
(a) Use your expression for equilibrium output to show how the effect of an increase in G on output
depends on the parameter d2
(b) An increase in the ratio d2/d1 means that money demand is more sensitive to the interest rate. Use
this interpretation to explain the result you found in part (a). Also use an IS-LM diagram to
illustrate your ans...
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