Macroeconomics 5th Canadian Edition Blanchard, Olivier J.; Johnson, David R. - Solutions

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[R ela ted to Don’t Let This Happen to You o n p a g e 11] Explain which of the following statements represent positive analysis and which represent normative analysis:a. The legalization of marijuana will lead to an increase in marijuana use by teenagers.b. The federal government should spend
[R elated to the C hapter O p en er o n page 1] In every El Nino year, coffee crops are likely to be damaged, reducing the amount of coffee available.a. How might a company, like Tim Hortons, that is part o f a market economy deal with the fact there was less coffee available?b. How might a
[Related to Making the Connection on page 11] Making the Connection explains that there are both positive and normative elements to the debate over raising the minimum wage. What economic statistics would be most useful in evaluating the positive elements of the debate? Assuming that these
Do you agree with the following assertion: “The problem with economics is that it assumes that consumers and firms always make the correct decision. But we know everyone’s human, and we all make mistakes.”
Suppose that a local radio station has decided to give away 100 tickets to a Nicki Minaj performance it’s promoting. It announces that tickets will be given away at 7:00 a . m . on Monday at the radio station’s studio.a. What groups of people will be most likely to try to get the tickets? Think
In a paper, economists Patricia M. Flynn and Michael A. Quinn state the following: We find evidence that Econom ics is a good choice of major for those aspiring to become a CEO [chief executive officer]. W hen adjusting for size of the pool o f graduates, those with undergraduate degrees in
Why does Bill Gates, one o f the richest people in the world, face scarcity? Does everyone face scarcity? Are there any exceptions?
Two students are discussing Solved Problem 1.1: J o e: “I think the key additional inform ation you need to know in deciding w hether or not you should watch another episode is the grade you’re currently getting and the grade you would get if you watched the extra episode. Then we can compare
Lizzy Pope and Jean Harvey found that offering first-year university students money to go to the gym on a regular basis increased gym attendance in the fall semester by between 49 and 51 percent and by 36 percent in the spring semester. They also found that the impact of the monetary incentive
Most provincial governments and the federal government in Canada offer programs and payments to encourage Canadians to have more children. The federal government currently pays all parents $160 per m onth for every child under six years old and $60 per month for every child between 6 and 18 years
The grading system is a powerful resource for teachers. In their book Effective Grading: A Tool fo r Learning and A ssessm ent, Barbara Walvoord and Virginia Anderson state that “teachers must manage the power and complexity o f the grading system” and that “teachers must consider grading in
Bank robberies are on the rise in New Jersey, and according to the FBI, this increase has little to do with the economic downturn. The FBI claims that banks have allowed themselves to becom e easy targets by refusing to install clear acrylic partitions, called “bandit barriers,” w hich
CONSIDER AN ECONOMY CHARACTERIZED BY THE FOLLOWING FACTS: i. The debt-to-GDP ratio is 40%. ii. The primary defi cit is 4% of GDP. iii. The normal growth rate is 3%. iv. The real interest rate is 3%.a. Using your favourite spreadsheet software, compute the debt-to-GDP ratio in 10 years, assuming
THE TWIN DEFICITSa. Identify and name the following terms i. r Bf t Yt ii. r Bf t Yt Tt iii. r Bf t Yt Tt Ct iv. Tt Gt v. r Bf t Xt Qtb. In an open economy, why might private investment, It, remain unchanged when the government cuts taxes?c. In an open economy, why might
ASSUME THAT THE DEMAND FOR CENTRAL BANK MONEY TAKES THE FORM H P = Y 31 - (r + pe )4 where Y 1000 and r 0.1.a. Assume that, in the short run, pe is constant and equal to 25%. Calculate the amount of seignorage for each annual rate of money growth, H/H, listed below. i. 25% ii. 50% iii. 75%b. In
BUDGET NUMBERS Consider an economy where the offi cial budget defi cit is 4% of GDP; the debt-to-GDP ratio is 100%; the nominal interest rate is 10%; and the infl ation rate is 7%.a. What is the primary defi cit/surplus?b. What is the infl ation-adjusted defi cit/surplus?c. Use the rule of thumb in
TRUE/FALSE/UNCERTAINa. The best way to measure the government defi cit is as a percent of GDP.b. Government can never have a negative debt position.c. The recession decreased the budget defi cit in most OECD countries.d. If Ricardian equivalence holds, an increase in taxes will affect neither
INFLATION TARGETS AND THE TAYLOR RULE Many countries around the world have set explicit infl ation targets for the central bank. Suppose the infl ation target is p* and the Phillips curve looks like the one described in the chapter: pt = pt-1 + a(ut - un)a. If the central bank is able to keep the
THE BANK OF CANADA Access the website of the Bank of Canada ( www. bankofcanada.ca).a. Find the most recent targeting agreement and identify the target for infl ation.b. Read the most recent press release concerning a change in interest rates and ask, “Does the Bank seem to be more worried about
NEGATIVE REAL INTEREST RATES “The worry that with defl ation real interest rates cannot be negative is misplaced. Fiscal policy can decrease the cost of borrowing as much as it wants, by offering subsidies to borrowers.” Discuss this statement.
MONETARY POLICY IN ACTION Using equation (24.1) , show three ways in which monetary policy can decrease the interest rate, given the level of output. In each case, explain how it works.
M2 AND M1 Suppose that M1 growth is very high but M2 growth is equal to zero. Should you worry about infl ation? Explain.
NOMINAL INTEREST RATES, INFLATION, AND TAXES Suppose you have a mortgage of $50,000. Consider two cases: i. Expected infl ation is 0%; the nominal interest rate on your mortgage is 4%. ii. Expected infl ation is 10%; the nominal interest rate on your mortgage is 14%.a. What is the real interest
MONEY DEMAND SHIFTS How would each of the following affect the demand for M1 and M2?a. Banks reduce penalties on early withdrawal from time deposits.b. It becomes possible to use your phone to make payments directly from an interest-earning term deposit.c. Government legislates a tax on all ATM
TRUE/FALSE/UNCERTAINa. The most important argument for a positive rate of infl ation in the OECD countries is seignorage.b. The Bank of Canada should target M2 growth.c. Fighting infl ation should be the Bank’s only purpose.d. Announcing target ranges for money growth would limit the fl
LIBERALS AND CONSERVATIVES There are two parties: the Liberals, who care a lot more about unemployment than about infl ation, and the Conservatives, who care a lot more about infl ation than about unemployment. The Phillips curve is given by: pt = pt e - a(ut - un) where pt e denotes expectations
THE NEW ZEALAND EXAMPLE New Zealand rewrote the charter of its central bank in the early 1990s to make steady, low infl ation its only goal. Why would New Zealand want to do this?
DESIGNING POLICY TO WIN ELECTIONS You are an advisor to a newly elected prime minister. She will face new elections four years from now. Infl ation last year was 3%, and the unemployment rate was equal to the natural rate. The Phillips curve is given by: pt = pt-1 - a(ut - un)a. Assume you can use
TIME CONSISTENCY Has the problem of “time consistency” ever arisen in your personal life? Who were the players in that “game”?
TRUE/FALSE/UNCERTAINa. There is so much uncertainty about the effects of monetary policy that we would be better off not using it.b. Elect a Liberal government if you want low unemployment.c. There is clear evidence of political business cycles in the United States: increases in economic activity
PAUL MARTIN’S DEFICIT REDUCTION PLAN When the Liberals were elected in 1993, the federal defi cit in fi scal year 1992–1993 was $40.4 billion. Finance Minister Paul Martin toured Canada making it clear that the federal defi cit would be reduced.a. What does defi cit reduction imply for output
FISCAL POLICY A new prime minister, who promised during her campaign that she would cut taxes, has just been elected. People trust that she will keep her promise but that the tax cuts will be implemented only in the future. Determine the impact of the election result on current output, the current
RATIONAL EXPECTATIONS “The rational expectations assumption is unrealistic, because it essentially amounts to the assumption that every consumer has perfect knowledge of the economy.” Discuss this statement.
POLICY EXPERIMENTS For each of the following, determine whether the IS curve, the LM curve, neither curve, or both curves shift. In each case, assume that expected current infl ation and future infl ation are equal to zero and that no other exogenous variable is changing.a. A decrease in the
TRUE/FALSE/UNCERTAINa. Changes in expected future one-year real interest rates have a much larger effect on spending than changes in the current one-year real interest rate.b. The introduction of expectations implies that the IS curve is still downward sloping but is now much fl atter.c. Current
EXPECTED NOMINAL AND REAL DEPRECIATIONS Assume that the nominal interest rate on 10-year bonds is 10% at home and 6% abroad. Further, assume infl ation is expected to be 6% at home and 3% abroad.a. What is the expected annual real depreciation consistent with interest parity?b. What is the
DERIVING THE INTEREST-PARITY CONDITION IN TERMS OF REAL INTEREST RATES This problem helps you derive equation (20.11)in the text. Start from the interest-parity condition: (1 + it) = (1 + i*t) Ee t+1 Et Recall the defi nition of the (domestic) real interest rate: (1 + rt ) = 1 + it 1 + pe t where
WORKING WITH THE DECISION TO BUY A HOUSE This problem helps you use and think about the fundamental equation that values a house, equation (20.11) .a. Suppose that real rent on a house is expected to be $600 per month forever and that one-year interest rates are expected to be constant at 3%.
EXPANSIONARY MONETARY POLICY AND THE YIELD CURVE In the previous chapter, we examined the effects of an increase in the growth rate of money on interest rates and infl ation.a. Draw the path of the nominal interest rate following an increase in growth rate of money. Suppose that the lowest point in
MACROECONOMICS AND STOCK PRICES Using the IS-LM model, determine the impact of each of the following on stock prices. If the effect is ambiguous, explain what additional information would be needed to reach a conclusion.a. An unexpected expansionary monetary policy with no change in fi scal
percentage point each year for the following three years. Determine the yield to maturity on a:a. one-year bond.b. two-year bond.c. three-year bond. 4. THE EQUITY PREMIUM, DIVIDENDS, AND STOCK PRICES A share is expected to pay a dividend of $1000 next year, and the real value of dividend payments
THE YIELD CURVE Suppose that the interest rate this year is 5% and fi nancial markets expect the interest rate to increase by
THE YIELD TO MATURITY Determine the yield to maturity of each of the following bonds:a. A discount bond with a face value of $1000, a maturity of three years, and a price of $800.b. A discount bond with a face value of $1000, a maturity of four years, and a price of $800.c. A discount bond with a
TRUE/FALSE/UNCERTAINa. Junk bonds are bonds nobody wants to hold.b. The price of a one-year bond decreases when the nominal one-year interest rate increases.c. Given the Fisher hypothesis (see Chapter 19 ), an upward-sloping yield curve may indicate that fi nancial markets are worried about infl
WHEN CONSUMERS ARE IMPATIENT The case where consumption is equal in the two periods is an extreme case. Many of us are impatient and want our. fun now. We can represent this by saying the period 1 con- sumption is always 5% larger than period 2 consumption.a. Draw the right-angled indifference
WHEN BORROWING AND LENDING RATES DIFFER Start from Figure 21A-1. After-tax labour income in period 1 is $40 and after-tax labour income in period 2 is $60. Draw the budget line when the consumer can borrow at 10% but receives only 7% return on his savings from period 1 to period 2.a. For the case
TRUE/FALSE/UNCERTAINa. An increase in expected future after-tax labour income in period 2 usually leads to an increase in consumption in period 1.b. An increase in period 1 after-tax labour income never leads to an equal increase in period 1 consumption.c. An increase in the real interest rate must
EXPECTED NOMINAL AND REAL DEPRECIATIONS Assume that the nominal interest rate on 10-year bonds is 10% at home and 6% abroad. Further, assume infl ation is expected to be 6% at home and 3% abroad.a. What is the expected annual real depreciation consistent with interest parity?b. What is the
DERIVING THE INTEREST-PARITY CONDITION IN TERMS OF REAL INTEREST RATES This problem helps you derive equation (20.11)in the text. Start from the interest-parity condition: (1 + it) = (1 + i*t) Ee t+1 Et Recall the defi nition of the (domestic) real interest rate: (1 + rt ) = 1 + it 1 + pe t where
WORKING WITH THE DECISION TO BUY A HOUSE This problem helps you use and think about the fundamental equation that values a house, equation (20.11) .a. Suppose that real rent on a house is expected to be $600 per month forever and that one-year interest rates are expected to be constant at 3%.
EXPANSIONARY MONETARY POLICY AND THE YIELD CURVE In the previous chapter, we examined the effects of an increase in the growth rate of money on interest rates and infl ation.a. Draw the path of the nominal interest rate following an increase in growth rate of money. Suppose that the lowest point in
MACROECONOMICS AND STOCK PRICES Using the IS-LM model, determine the impact of each of the following on stock prices. If the effect is ambiguous, explain what additional information would be needed to reach a conclusion.a. An unexpected expansionary monetary policy with no change in fi scal
THE EQUITY PREMIUM, DIVIDENDS, AND STOCK PRICES A share is expected to pay a dividend of $1000 next year, and the real value of dividend payments is expected to increase by 3% per year forever after. Determine the current price of the stock if the real interest rate is expected to remain constant
percentage point each year for the following three years. Determine the yield to maturity on a:a. one-year bond.b. two-year bond.c. three-year bond.
THE YIELD CURVE Suppose that the interest rate this year is 5% and fi nancial markets expect the interest rate to increase by
THE YIELD TO MATURITY Determine the yield to maturity of each of the following bonds:a. A discount bond with a face value of $1000, a maturity of three years, and a price of $800.b. A discount bond with a face value of $1000, a maturity of four years, and a price of $800.c. A discount bond with a
TRUE/FALSE/UNCERTAINa. Junk bonds are bonds nobody wants to hold.b. The price of a one-year bond decreases when the nominal one-year interest rate increases.c. Given the Fisher hypothesis (see Chapter 19 ), an upward-sloping yield curve may indicate that fi nancial markets are worried about infl
THE SHORT-RUN EFFECTS OF AN INCREASE IN MONEY GROWTH REVISITED When looking at the short run in section 19-4, we concentrated on the effects of higher nominal money growth on the real money stock. We saw how this led to higher output and lower nominal and real interest rates. Starting from the
THE FISHER HYPOTHESISa. What is the Fisher hypothesis?b. Does the experience of Latin American countries in the 1990s support or refute the Fisher hypothesis? Explain.c. Look at the fi gure in the Focus box on Latin America. Note that the line drawn through the scatter of point does not go through
CONSOLS The present value of an infi nite stream of dollar payments of $ z (that starts next year) is $ z/ i when the nominal interest rate, i, is constant. This formula gives the price of a consol. It also is a good approximation for the present discounted value of a stream of constant payments
EARLY VERSUS LATE TAX CREDITS You want to save $2000 today for retirement in 40 years. You have to choose between two plans: i. Pay no taxes today, put the money in an interest-yielding account, and pay taxes equal to 25% of the total amount withdrawn at retirement. (This is similar to most RRSPs.)
REAL AND NOMINAL INTEREST RATES: PART II For each of the following, compute the real interest rate using the exact formula and the approximation formula.a. i = 4%; pe = 2%b. i = 15%; pe = 11%c. i = 54%; pe = 46%19.4. REAL AND NOMINAL INTEREST RATES: PART IIIa. Can the nominal interest rate ever be
REAL AND NOMINAL INTEREST RATES: PART I Explain whether you would use real payments and real interest rates or nominal payments and nominal interests rates to compute:a. The present discounted value of the profi ts from purchasing a new machine.b. The present value of a 20-year government bond.c.
TRUE/FALSE/UNCERTAINa. As long as infl ation remains roughly constant, the movements in the real interest rate are equal to the movements in the nominal interest rate.b. If infl ation turns out to be higher than expected, then the realized real cost of borrowing turns out to be lower than
THE INTERNATIONAL DEBTS OF THE UNITED STATES [WEB] The international debts of the United States are of direct concern to Canadians. The United States is our largest trading partner. A very useful source of basic American economic data is the Appendix Tables to the Economic Report of the
AN INCREASE IN CAPITAL AND INTERNATIONAL DEBTS Fill in the missing values in Table 1, Question 3 below. CA t is notation for the current account balance. All other notations are in the text. The stock variable B f t is calculated at the end of the period using equation (18.4) . The stock variable K
IMMIGRATION POLICY IN CANADA Consider immigration policy in Canada in more detail by working with Table 18–1 .a. Is natural population growth in Canada expected to become negative in Table 18–1 ?b. If the government decided to reduce total immigration by 50,000 persons per year starting in
TRUE/FALSE/UNCERTAINa. Total population in a country increases only if there is an excess of births over deaths.b. Canadians owned no foreign assets in 2012.c. Average hours of work in Canada have declined over the past decade.d. In an open economy, the capital stock can be expanded without a
GROWTH ACCOUNTING In the appendix to this chapter, it is shown how data on output, capital, and labour can be used to construct estimates of the rate of growth of technological progress. Consider the following production function, which gives a good description of production in rich countries: Y =
STEADY STATE OUTPUT AND TECHNOLOGICAL PROGRESS Suppose that the economy’s production function is: Y = 2K2NA and that the saving rate ( s) is equal to 16% and the rate of depreciation () is equal to 10%. Further, suppose that the number of workers grows at 2% per year and the rate of
THE SLOWDOWN IN PRODUCTIVITY GROWTH Consider the following two scenarios: i. The rate of technological progress declines forever. ii. The saving rate declines forever.a. What is the impact of each of these scenarios on economic growth over the next fi ve years?b. Over the next fi ve decades? In
DIFFUSION OF INVENTIONS Use the medical and automobile industries to provide examples of technological advances that have not yet fully diffused in the economy. Can you think of some advances in those industries whose diffusion is relatively more important than that of others for society? Name a
PATENTS AND GROWTH Where does technological progress come from for the economic leaders of the world? Where does it come from in the developing countries? Do you see any reasons why the developing countries may choose to have poor patent protection? Are there any dangers in such a policy (for
R&D SPENDING Why is the amount of R&D spending important for growth? How do the appropriability and fertility of research affect the amount of R&D spending? For each of the following policy proposals, determine how the appropriability and fertility of research are affected and what you expect the
TRUE/FALSE/UNCERTAINa. Writing the production function in terms of capital and effective labour implies that as the level of technology increases by a certain percentage, the number of workers required to achieve the same level of output decreases by the same percentage.b. Because our production
USE THE MODEL OF ENDOGENOUS GROWTH IN EQUATIONS (16.11) AND (16.12)a. Graph Y t AK t as a function of K t. Why is this production function not characterized by diminishing returns?b. Is there a situation in which the rate of growth of output per person in this model is zero?c. What is the effect
SEARCHING FOR THE GOLDEN RULE Suppose that the production function is given by Y = 0.52K2N.a. Derive the steady-state levels of K/ N and Y/ N in terms of the saving rate ( s) and the depreciation rate (d).b. Derive the equation for steady-state output per worker and steady-state consumption per
GROWTH WITH A MORE GENERAL PRODUCTION FUNCTION, PART II Suppose that the economy’s production function is Y K1/3N2/3 and that both the saving rate ( s) and the depreciation rate (d) are equal to 0.10.a. What is the steady-state level of capital per worker?b. What is the steady-state level of
and s 0.32. h. Suppose that the depreciation rate remains constant at d 0.08, whereas the saving rate is reduced by half to s 0.16. What happens to the steady state level of output per worker?
GROWTH WITH A MORE GENERAL PRODUCTION FUNCTION, PART I Suppose that the economy’s production function is given by Y = KaN1−a. (This production function is called the Cobb– Douglas production function.) See the appendix for details. In section 16-3 , we took a to be 1/2. Assume now that a
THE DETERMINANTS OF OUTPUT PER WORKER IN STEADY STATE Discuss the likely impact of the following changes on the level of output per worker in the long run:a. The right to exclude saving from income when paying the income taxb. A higher rate of female participation (but constant population)
THE PARADOX OF SAVING REVISITED In Chapter 3 , we saw that an increase in the saving rate can lead to a recession in the short run. You now can examine the effects beyond the short run. If the saving rate increases permanently, what will be the effect on the growth rate after 1 year, 10 years, 50
THE GROWTH RATE AND THE SAVING RATE “The Chinese growth rate of output per worker will remain higher than that of Canada for as long as the Chinese saving rate exceeds that of Canada.” Do you agree with this statement? Why, or why not?
TRUE/FALSE/UNCERTAINa. The saving rate is always equal to the investment rate.b. A higher investment rate can sustain growth of output forever.c. If capital never depreciated, growth could go on forever.d. The higher the saving rate, the higher is consumption in steady state.e. Output per capita in
GROWTH SUCCESSES AND FAILURES Go to the website containing the Penn World Table and collect data on real GDP per capita (chained series) for 1970 for all available countries. Do the same for a recent year of data, say one year before the most recent year available in the Penn World Table. (If you
CONVERGENCE IN TWO SETS OF COUNTRIES Go to the website containing the Penn World Table and collect data on real GDP per capita (chained series) from 1951 to the most recent year available for the United States, France, Belgium, Italy, Argentina, Venezuela, Chad, and Madagascar.a. Defi ne for each
GROWTH AND TECHNOLOGICAL PROGRESS Between 1950 and 1973, France and Japan experienced growth rates that were at least 2 percentage points higher than those in Canada or the United States. Yet, the most important technical advances of that period were made in North America. How can this be?
THE PRODUCTION FUNCTION AND CONSTANT RETURNS TO SCALE Consider the production function Y = 2K2Na. Compute output when K 49 and N 81.b. If both capital and labour double, what happens to output?c. Is this production function characterized by constant returns to scale? Explain.d. Write this
PURCHASING POWER PARITY Assume that typical consumers in Mexico and Canada buy the quantities and pay the prices indicated in the accompanying table:Bread Car Services Price Quantity Price Quantity Mexico 1 peso 400 7 pesos 300 Canada $1 1000 $2 2000a. Compute Canadian consumption per capita in
THE DECREASE IN GROWTH SINCE 1973 Use Table 15–1to answer the following questions:a. Compute what output per capita would have been in 2010 for each of the fi ve rich countries if the growth rate from 1973 to 2010 for each country had remained the same as during 1950 to 1973.b. What would have
TRUE/FALSE/UNCERTAINa. Despite the Great Depression, Canadian output was higher in 1940 than in 1929.b. On a log scale, a variable that increases at 5% a year will move along an upward-sloping line, with slope 0.05.c. If Japan had continued to grow at the same rate during 1974 to 2010 as it had
yuan per U.S. dollar. Over this period, China had a very large trade surplus, particularly with the United States. The American policy response was to ask the Chinese to abandon a decade-long fi xed exchange rate to the U.S. dollar.a. If the yuan were to be revalued by 20%, calculate what its new
THE PRESSURE ON CHINA TO REVALUE DURING 2005 Between 2004 and 2005, there was a tremendous pressure on China to revalue the yuan. The reasons are fairly clear. As the Chinese economy modernized and joined the world economy, it did so with a fi xed exchange rate of
THE UNIFICATION OF GERMANY When East Germany and West Germany were reunited in 1990, the exchange rate between the two countries was irrevocably fi xed. In a symbolic gesture of equality between the two countries, it was decreed that one East German mark would be worth the same as one West German
SHORT-RUN AND MEDIUM-RUN EFFECTS OF CHANGES IN GOVERNMENT SPENDING Consider a country operating under fi xed exchange rates, with aggregate demand and aggregate supply given by: Yt = Y a EP* Pt , G, Tb and Pt = Pt-1(1 + m) F a1 - Yt L , zb Assume the economy is initially in medium-run equilibrium,
EXCHANGE RATE CHANGES WITH DOMESTIC AND FOREIGN INFLATIONa. Use the data below in Table 1, Question 3 to calculate nominal exchange rates in period t+1, t+2, and t+3 that keep the real exchange rate constant.b. If the foreign rate of interest is 8% each period and the expected exchange rate in
A CLOSER LOOK AT AGGREGATE DEMAND Consider the specifi cation of the aggregate demand relation in an open economy with fi xed exchange rates given in the text: Y = C(Y - T) + I(Y, i*) + G + NX aY, Y*, EP* P ba. Discuss the effects on output, given the domestic price level, of an increase in the
TRUE/FALSE/UNCERTAINa. Britain’s return to the gold standard caused years of high unemployment.b. If, in a country committed to a fi xed exchange rate, investors suddenly fear a severe devaluation, they may well trigger an exchange rate crisis.c. Because speculative behaviour by foreign investors
POLICY RECOMMENDATIONS Suppose that you are advising a government that wants to reduce its infl ation rate. It is considering two options: a gradual reduction over several years and an immediate reduction.a. Lay out the arguments for and against each option.b. If the only criterion you were to
THE EFFECTS OF A PERMANENT DECREASE IN MONEY GROWTH Suppose that the economy can be described by the following three equations: ut - ut-1 = -0.4(gyt - 3%) Okun’s law pt - pt-1 = -(ut - 5%) Phillips curve gyt = gMt - pt aggregate demanda. Reduce the three equations to two by substituting g yt

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Macroeconomics 5th Canadian Edition Blanchard, Olivier J.; Johnson, David R. - Solutions

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