Midterm2sample2 - CORNELL UNIVERSITY ECON 302...

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CORNELL UNIVERSITY ECON 3 02 - Macroeconomics Professor Levon Barseghyan Fall 200 5 Sample Prelim 2 1. Suppose that the price level is fixed in the short run so that the economy doesn't reach general equilibrium immediately after a change in the economy. For each of the following changes, what are the short run effects on the real interest rate and output? Assume that in the short run firms are willing to produce enough output to meet the aggregate demand for goods. Assume that the goods market and asset market are always in equilibrium. Hint: use the aggregate demand and supply or IS-LM apparatus developed in class to figure what happens to output after the change. Then use the asset market equilibrium condition to figure out what must happen to the interest rate in order for demand and supply of real balances to equal each other. a. An increase in consumer optimism that increases desired consumption at each level of income and the real interest rate.
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