Problem Set I - Unsloved

# Problem Set I - Unsloved - Lahore School of Economics...

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Lahore School of Economics Macroeconomics II – Spring 2011 BSC II - Problem Set 1 Due Date: 15 January, 2011 1. How often does the price you pay for haircut change? What does your answer imply about the usefulness of market-clearing models for analyzing the market for haircuts? 2. Let’s examine how the goals of the State Bank of Pakistan influence its response to shocks. Suppose SBP A cares only about keeping the price level stable, and SBP B cares only about keeping the output and employment at their natural rates. Explain how each SBP would respond to a. An exogenous decrease in the velocity of money b. An exogenous increase in the price of oil 3. Use the Fisher model to discuss the effect of a rise in real interest rate when the consumer is a borrower in the first period. Display an appropriate diagram. 4. Jack and Jill both obey the two-period Fisher model of consumption. Jack earns \$100 in the first period and \$ 100 in the second period. Jill earns nothing in the first period and \$210 in the second period. Both of them can borrow or lend at the interest rate r . a. You observe both Jack and Jill consuming \$100 in the first period and \$100 in the second period. What is the interest rate r ?

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