Using the aggregate demand/ inflation Adjustment Model
For each of the following scenarios, find the change in GDP, inflation and the real interest rate
for each of the following scenarios.
The graphical analysis must be correctly labeled and explanations
Suppose a reverse supply shock (e.g. oil price increase), how will this affect the savings
and investment? if it is a temporary change? If it is a permanent change?
(a) The temporary increase in the price of oil reduces the marginal product of labor, c
ANSWERS TO CHECKPOINTS
CHECKPOINT 12.1 Money and the Interest Rate
The quantity of money supplied is $3.9 trillion.
At this point, we know
The Fed uses open market operations to
purchase/sell U.S. Treasury securities in the open
These open market operations increase or decrease
the money supply, depending upon whether the
Fed is purchasing or selli
General Equilibrium in the IS LM Model
The IS LM Model, Part 3
Equilibrium in the Labor Market
Equilibrium in the labor market leads to employment at its full-employment level (N) and output at its full-employment level (Y ).
The full e
Answer Key for Problem Set 3
(a) As Figure 4.5 shows, the shift to the right in the saving curve from S1 to S2 causes saving and
investment to increase and the real interest rate to decrease.
(b) This is really just a tra
1. Desired consumption and investment are
C^d = 4000 4000r +0.20 Y;
I^d = 2400 4000r.
As usual, Y is output and r is the real interest rate. Government purchases, G, are 2000.
a) Find an equation relating desired national saving, S^d, to r and Y.
Solutions to Problems
1a. A decrease in government expenditures leads to a decrease in aggregate demand, which in turn sets up a
process in which real GDP starts to decrease and the price level starts to fall.
The decrease in government expendi
ECON 362-01: MACROECONOMIC THEORY
PROBLEM SET I
due Tuesday, June 04
When answering questions,
use graphs for the labor market as well as the production function, and
provide a concise explanation to those drawings (i.e. you should refer