Problem Set 1 - Economics 134 Spring 2012 Professor...

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Economics 134 Professor Christina Romer Spring 2012 Professor David Romer PROBLEM SET 1 D UE AT THE BEGINNING OF LECTURE , F EBRUARY 9 You may work together on the problems, but you should try each question yourself and the answers must be written up in your own words. For all questions be sure to explain your answers carefully and to use graphs whenever appropriate. 1. Describe how, if at all, each of the following developments affects the real interest rate and output in the short run. In part (c), assume that the central bank is following an interest rate rule. a. The central bank changes its monetary policy rule so that it sets a lower level of the real interest rate at a given level of output than before. b. The central bank raises its target for the money stock. c. Consumer confidence rises – that is, consumers change their behavior so that consumption at a given level of disposable income is higher than before 2. Our baseline model assumes that consumption is determined by disposable income: , with the function increasing. But the real interest rate may also affect households’ choice between consumption and saving. This problem therefore asks you to consider the implications of some alternative assumptions. Throughout, assume that the central bank is following an interest rate rule. a.
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Problem Set 1 - Economics 134 Spring 2012 Professor...

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