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Final_101_fall_2013

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Unformatted text preview: that makes a person indifferent between the two options? e) How would your answer under c) change if a person could obtain the same master at the same cost but also be working (and earning) half‐time during the first year? Problem 3: 2 points for each question Consider the IS‐MP model in a situation of economic turbulence, when banks require a risk premium to lend to companies so that: IS: ~ Yt = a − 0.5( Rt − 2%) MP: Rt = it − π t + p The central bank sets it the risk free nominal interest rate, but the real interest rate contains also a risk‐premium, p , that is 0 in the long‐run but can be positive in periods of high volatility. Consider the economy initially at the long run equilibrium with no demand shock, real interest rate equal to the marginal product of capital, short run output at 0, inflation at 2% and p =0. a) What is the nominal interest rate...
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