# 4 Questions about the Intermediate Macroeconomics

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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