ans5154a - Econ 154b Spring 2005 Suggested Solutions to...

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Econ 154b Spring 2005 Suggested Solutions to Problem Set 5 Question 1 For the period analyzed, of all quarterly changes in the civilian unemployment rate by at least 0.2 percentage points, about 80 were followed by changes of similar magnitude in the same direction; about 30 were followed by changes of similar magnitude in the opposite direction; and about 20 were followed by no changes of similar magnitude. We conclude that the unemployment rate is a persistent variable. Question 2 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 LM curve is M / P L 0.5 Y 200 i 0.5 Y 200 r 0.5 Y 200 r . (a) For this question, T G 450, M 9000. The IS curve gives Y 4350 800 r 2 G T 4350 800 r 2 450 450 4800 800 r . The LM curve gives 9000/ P 0.5 Y 200 r . To find the aggregate demand curve, eliminate r in the two equations by multiplying the LM curve through by 4 and rearrange the resulting equation and the IS curve.
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