Assignment 7

Note

A Microsoft word version of the assignment can be found here

Note

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

1. Identify the meaning of each variable.

2. Derive the IS curve.

3. Derive the MP curve

4. Solve for equilibrium

Comparative statics

Suppose there is a collapse in autonomous consumption, such that it falls from $220$ to $100$.

5. 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.

6. Calculate the new equilibrium level and the output gap, assuming that the equilibrium in 4 was potential output.

7. How should the Federal Reserve respond to close the output gap? (calculate)

8. Sketch the Federal Reserve’s response in a graph.