Midterm $4$

True, False or Uncertain

State whether the claims in these statements are true, false or ambiguous and explain why. You must provide an explanation to receive any credit. Drawing graphs and arrows only, will yield minimum credit.

a$."$In the Mundell$-$Fleming $($IS$*-$LM$*)$ Model with fixed exchange rates, a contractionary monetary policy will have no effect on output in the long$-$run."

b$.$ "A positive supply shock will shift the Phillips curve to the right."

c$.$ "Under a fixed$-$exchange rate system, the devaluation of the currency by the Central Bank will result in higher aggregate output."

Mundell$-$Fleming Model

$2.$ Economic expansion throughout the rest of the world raises the world interest rate. Use the Mundell$-$Fleming model to illustrate graphically the impact of an increase in the world interest rate on the exchange rate and level of output in a small open economy with a floating$-$exchangerate system. Be sure to label: i$.$ the axes; ii$.$ the curves; iii. the initial equilibrium levels; iv$.$ the direction the curves shift; and v$.$ the new short$-$run equilibrium.

$3.$ Suppose Congress cuts government spending in order to balance the budget. Use the MundellFleming model with floating exchange rates to illustrate graphically the short$-$run impact of the cuts in government spending on the dollar exchange rate and output in the United States. Be sure to label: i$.$ the axes; ii$.$ the curves; iii. the initial equilibrium levels; iv$.$ the direction the curves shift; and v $.$ the new short$-$run equilibrium.

The Phillips Curve and AD$-$AS

$4.$ Assume that an economy is initially at the natural rate of unemployment.

a$.$ Use a Phillips curve diagram to illustrate graphically how the inflation rate and unemployment rate respond both in the short run and in the long run to an unexpected expansionary monetary policy

b$.$ Use a Phillips curve diagram to illustrate graphically how the inflation rate and unemployment rate respond both in the short run and in the long run to the announcement of a credible plan of expansionary