Suppose now the economy is under a fixed-exchange-rate regime. Use a
proper diagram to analyze the impact of this policy on aggregate income (Y), the
exchange rate (e), and the trade balance (NX). (8%)
What is the impossible trinity? Use the results you obtain from (1) and (2) to
illustrate your answer. (10%)
IS-LM and AS-AD (24%)
Consider an economy that is hit by two shocks: a collapse in the subprime
mortgage market and a dramatic increase in oil price. Answer the following
questions.
Use the IS-LM diagram to show the impact of the collapse in mortgage market on
aggregate demand (AD) curve. (6%)
IS-LM and AS-AD (24%)
Consider an economy that is hit by two shocks: a collapse in the subprime
mortgage market and a dramatic increase in oil price. Answer the following
questions.
Use the AS-AD diagram to analyze the impact of these two shocks on
aggregate income and the price level in the short run. (6%)
IS-LM and AS-AD (24%)
Consider an economy that is hit by two shocks: a collapse in the subprime
mortgage market and a dramatic increase in oil price. Answer the following
questions.
If the policymakers of the economy want to counteract the impact of the shocks on
aggregate income (in other words, they want to keep the level of aggregate income
unchanged), what kinds of macroeconomic policies (monetary and/or fiscal policies)
should they adopt? Briefly explain your answer. (6%)
IS-LM and AS-AD (24%)
Consider an economy that is hit by two shocks: a collapse in the subprime
mortgage market and a dramatic increase in oil price. Answer the following
questions.
If the policymakers of the economy want to counteract the impact of the shocks on
the price level, what kinds of macroeconomic policies (monetary and/or fiscal
policies) should they adopt? Briefly explain your answer. (6%)
Short Essay Questions (24%)
Use the policy implications of the Phillips Curve to explain the Lucas Critique?
(12%)
Short Essay Questions (24%)
John Keynes and Irving Fisher have different viewpoints about how people make
intertemporal choices on consumption. Whose theory is in better accord with the
idea of Ricardian Equivalence? Explain your answer. (12%)
Suppose the economy is currently in the steady state (associated with s =
0.6). If people in the economy want to increase the steady-state level of
consumption per worker (in other words, they want to move to a steady state with a
higher level of consumption per worker), should they increase or decrease their
saving rate? Briefly explain your answer. (6%)
Suppose, again, the economy is currently in the steady state. If
people in this economy want to increase the economic growth rate in the long run
(in other words, they want to move to a steady state with a higher rate of economic
growth), should they increase or decrease their saving rate? Briefly explain your
answer. (Economic growth rate is defined here as the growth rate of output per
worker.) (6%)
(4) Would your answer in (3) be different if we add technological progress to the
Solow model? Explain your answer. (6%)
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