Answer5 - 1 ECO 301 Intermediate Macroeconomics Spring 2010...

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1 ECO 301 Intermediate Macroeconomics Spring 2010 Instructor: Yangyi Shan Homework Assignment 5 Answer Key 1. (10 points) Real money demand is M d / P = 500 + 0.2 Y – 1000 i = 500 + (0.2 × 1000) – (1000 × 0.10) = 600. Nominal money demand is M d = ( M d / P ) × P = 600 × 100 = 60,000. Velocity is V = PY / M d = 100 × 1000/60,000 = 1 2/3. 2. (10 points, 5 points each) Δ P / P = Δ M / M – ( η Y Δ Y / Y + η i Δ i / i) (a) P / P = η Y Y / Y = –0.5 × 6% = –3%. The price level will be 3% lower. (b) P / P = r Δ i / i = –(–0.1) × 0.1 = 1%. The price level will be 1% higher. 3. (40 points) The IS curve is found by setting desired saving equal to desired investment. Desired saving is S d = Y C d G = Y – [1275 + 0.5( Y T ) – 200 r ] – G . Setting S d = I d gives Y – [1275 + 0.5( Y T ) – 200 r ] – G = 900 –200 r, or Y = 4350 – 800 r + 2 G T . The
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Answer5 - 1 ECO 301 Intermediate Macroeconomics Spring 2010...

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