Download Practice for Exam 2 - Econ 304 - we will do this

Practice for Exam 2 - Econ 304 - we will do this in its entirety in class!
6) The Economy is characterized by the following:
a) (10 points) Derive an expression for the IS curve....Y in terms of r
b) (10 points) Name 3 reasons why this IS curve would get flatter and what does a flatter IS curve mean for
the effectiveness of monetary policy? Explain.
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c) (10 points total) The Monetary Policy (MP) curve is typically given by the following:
MP:
(5 points) What is
exactly?? Has it changed in the last 10 years and if so, why and in which direction?
(5 points) What does λ represent and what value does it normally take and why. If λ were to increase, what
would that imply?
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8) Problem (50 points)
IS :
MP:
Y = 16 - r
r = r(bar) + λ π
SRAS: π = π -1 + 1 ( Y - Y P)
Potential GDP: YP = 14, π
-1
= 2%, λ = .5, r(bar) = 1
a) (5 points) Derive an expression for Aggregate Demand
Draw three diagrams: on top left, draw an MP curve, to the right of the MP, draw an IS curve, and below
the IS curve, draw and Aggregate Demand and Aggregate Supply curve. Start at point A where Y = 14.
Show point A on an MP diagram, the IS curve, and the AD, AS diagram.
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15 points for correct and completely labeled diagram
Now suppose the IS curve changes and is now:
IS:
Y = 17 - r
b) (5 points) Name 3 reasons why the IS curve would change the way it does?
c) (5 points) Now solve for short - run equilibrium and label as point B on your three diagrams.
d) ( 5 points) Now solve for the long-run equilibrium and label as point C on your three diagrams.
e)( 5 points) What do we call the movement from points A, to B, to C?
f) (10 points) If the Fed wanted to keep inflation at it original level (this is their job!), what could they do
exactly and how would your diagrams be effected? Please refer to each diagram.
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