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Homework3 - Econ 352 Intermediate Economics YiLi Chien...

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Econ 352 YiLi Chien Intermediate Economics Spring 2011 Homework Assignment 3 Due on April 13 th in class Question 1 (30 pts): The advent of interest-earning checking accounts in the early 1980s led many households to keep a larger proportion of their income in checking accounts. Suppose prices are sticky in the short run, but fully flexible in the long run (Keynesian model). Assume that the economy is initially in the long-run equilibrium. a. (15 pts) Use the aggregate demand – aggregate supply model to illustrate graphically the impact in the short run and the long run of this change in checking account. (Be sure to label the axes, the curves, the initial equilibrium values, the direction the curves shift, the short-run equilibrium values, and the long-run equilibrium values) State in words what happens to prices and output in the short run and the long run. b. (15 pts) If the Fed would like to stabilize the output, should the Fed keep the money supply constant in response to this change in checking account? Explain your answer.
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