home5_F07 - Kevin D Salyer Economics 137 Fall 2007 1 Homework#5 Due Dec 7(in class 1 Consider the following IS-LM model Y = a0 a1 r u M = b0 b1 Y b2 r v

home5_F07 - Kevin D Salyer Economics 137 Fall 2007 1...

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Kevin D. Salyer, Economics 137, Fall 2007 1 Homework #5 - Due Dec. 7 (in class) 1. Consider the following IS-LM model:Y=a0+a1r+uM=b0+b1Y+b2r+vwhereu; vdenote random shocks to the goods and money market respec-tively.Express the model in reduced form under the assumption that themoney supply is the instrument of monetary policy.2. According to Blinder, why have virtually all central banks adopted aninterest rate instrument?3. Blinder states (on p.27): °Returning to Poole±s dichotomy, let me remindyou of his basic conclusion:that large LM shocks militate in favor oftargeting interest rates while large IS shocks militate in favor of targetingthe money supply.² Explain why Poole reached this conclusion.4. Using the Poole model, prove that the optimal setting of the money supply

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