d Briefly explain the meaning of a liquidity trap in the context of the IS LM

# D briefly explain the meaning of a liquidity trap in

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(d) Briefly explain the meaning of a liquidity trap in the context of the IS-LM model and its implications for monetary policy. 4. Aggeregate Demand and Supply (a) Using the IS-LM model, carefully explain why the AD curve is downward sloping? Using the sticky price model, carefully explain why the short-run AS curve is upward sloping? (b) Briefly discuss the relationship between the aggregate supply curve and the Phillips curve. (c) Suppose a country is in an initial equilibrium where output is below its long run equilibrium level. Use an AD-AS and IS-LM diagram to show how government expenditure policy can be used to raise output to its long run level. (d) In our study of aggregate supply, we learned how people formed expectations of inflation. Breifly distinguish the difference between adaptive and rational expectations. (Please turn over for Question 5)
5. Long Run Growth & The Solow Model Suppose that we know that the economy of Econland can be described by the following production function ° = ±²³, ´µ = ³ ¶.· ´ ¶.¸ (a) Does Econland have a production function with constant returns to scale? Explain why/why not? (b) Calculate the per-worker production function. Find the steady state capital per worker, output per worker and consumption per worker as a function of the savings rate and the depreciation. (note, in this question you can assume no growth in population or technology).

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• Spring '14
• Dr.GonzaloForgues-Puccio

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