Assignment 7
A Microsoft word version of the assignment can be found here
A Microsoft word version of the assignment answers can be found here
An ISMP Model
Consider the following economy
\(C=220+0.4YD\)
\(I = 160 + .1Y - 1800 (i - \pi_e +x)\)
\(T = 80\)
\(G = 50\)
\(i = 0.08\)
\(\pi_e = 0.03\)
\(x = 0.02\)
Basic Equilibrium
Identify the meaning of each variable.
Derive the IS curve.
Derive the MP curve
Solve for equilibrium
Comparative statics
Suppose there is a collapse in autonomous consumption, such that it falls from \(220\) to \(100\).
Sketch an IS-MP model (don’t worry about labeling intercepts or getting the slope right - just do a rough sketch) and show this change.
Calculate the new equilibrium level and the output gap, assuming that the equilibrium in 4 was potential output.
How should the Federal Reserve respond to close the output gap? (calculate)
Sketch the Federal Reserve’s response in a graph.