See the attached file please
204 Intermediate Macroeconomics
Assignment #2
1. Consider the following íextendedíIS-LM model:
Y = C + I + G
C = c0 +
2
3
(Y T)
I = 150 +
1
6
Y 2000(i
e + x)
G = G
T =
1
4
Y
i = {
Suppose that initially
c0 = 120
e = 0:02
x = 0:03
G = 150
{ = 0:05
(a) Find the equilibrium solution for Y; C and I:
(b) Suppose that the equilibrium value derived under (a) represents ífull
employmentí Now suppose that there is a shock to c0 and x: The
new values are c0 = 100 and x = 0:08: Derive the new equilibrium
solution for Y; C and I:
(c) Can full employment be restored using conventional monetary policy?
Explain.
(d) Can full employment be restored using Öscal policy? Explain.
(e) Can the initial equilibrium values for Y; C and I be restored using a
combination of monetary and Öscal policy? If so, explain how this
can be done.
2. Brieáy discuss the relevance the model in question 1 for understanding
the ígreat recessioníthat started in late 2007.
1
3. Suppose that the wage-setting and price-setting equations are given by
w = p
eF(u; z) = p
e
(0:75