1. a. There is an inflationary gap of $500 m in the full SR model, IS-LM; and I=450 + 0.25Y-1500i; C=350+.65 Y_D. Calculate the required t_o policy and show what will happen, cet. par., in the appropriate graph.

b. Assume the economy is at Y_FE. In the full SR model, IS-LM, show what will happen if firm confidence falls, cet. par. What will happen to the components of the goods market? Use directional arrows to show and explain all these changes. Who should do what if FE is the goal of policy?

c. We are in eqm in the full SR model, IS-LM. Following a single shock (so that only one curve shifts), cet. par., we see that the nominal interest rate has fallen and Y has risen then we know with certainty that the Fed has engaged in expansionary policy. True, False, or Uncertain? Show graph in i-Y space and explain fully.

d. In the full SR model, IS-LM, we know that if t_o falls, cet. par., then the real Money Supply will increase. True, False, Uncertain? Explain. Show graphs in i-Y space and i-M/P spaces.

e. We are in eqm in the full SR model, extended IS-LM (in r-Y space).

i. If expected inflation rises, what must the Fed do given the assumptions of this model and assuming that the initial eqm r is the target r? Explain by using and providing name for the appropriate equation. What happens in the graph?

ii. Go back to the original eqm. If the risk premium falls, cet. par., what will happen? Explain, using appropriate term, and show what will happen in the graph.

iii. Assume the nominal interest rate is 0, expected inflation is fixed, and there is a recessionary gap. What is this “problem” called? Which macro policymaker is constrained in this case and what must they therefore do?

Answer rating: 100% (QA)

a In order to close the inflationary gap the government would need to pursue contractionary fiscal p... View the full answer