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Homework 2 Winter 2024

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25 views2 pages

Homework 2 Winter 2024

Uploaded by

lizzykuz04
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Econ 305 Homework (You are graded on Effort and Completeness. Copying answers off other
sources results in a 0 for the course. If you just try all the problems on your own—even if wrong—
that results in a 100% for the homework) Many of the problems have poor (and wrong) solutions on
Chegg. I have printouts of them on my wall. Do not copy these solutions. This results in a 0 for the
whole assignment.

1. Using both IS/LM/FE and the AD/AS models, and the Keynesian assumptions,
a. Suppose that the increased risk from the previous question is occurring. Show graphically
the expected changes in both the Short Run and the Long Run for the interest rate, GDP,
and Prices.
b. On a separate graph, starting in the Short Run what policy would the Fed do to stabilize
the economy. Show what would happen to the interest rate, GDP and Prices.
c. On a separate graph, starting in the Short Run what policies (3) would the Government do
to stabilize the economy. Show what would happen to the interest rate, GDP and Prices.
2. (This is from an old final exam—only question on the final—so the point values give an indication
on how things were weighted but don’t pertain to how this homework is graded)
Labor Market and Production:
N=50+2W
N=125-W
Y = 1*K.5N.5 , K=25
Goods Market: Asset Market:
C = 15+0.5(Y-T) -25r MS = 35/P; assume that the P=1 initially
I = 10-100r MD = 0.5*Y - 100r +20
G=25-25r
T=20
a. (5 points) What is the equilibrium wage, employment level, and the full employment level of
output? Draw this all graphically and make sure to label the graph.
b. (10 points) Use the information from part a along with the goods market and the asset market
equations. Derive the IS and LM equations (show all steps). What are the initial general
equilibrium interest rate, output, and price? Draw this graphically under the Keynesian
assumptions. Include both the IS/LM/FE and the AD/AS models making sure to completely label
the graphs.
c. (20 points) Suppose that when Bear Stearns (a very large investment bank that had a share price of
$133.20 prior to their collapse where JPMorgan Chase bought them for only $10/share) collapsed
in March of 2008 the perceived risk of financial markets increased changing MD by 5 units. What
are the Short Run and Long Run values for the interest rate, output, and price? Draw this
graphically under the Keynesian assumptions. Include both the IS/LM/FE and the AD/AS models
making sure to completely label the graphs. This can be done on the previous graphs.
d. (5 points) This should be done on a new a new set of graphs. Suppose when the economy is in
the Short Run equilibrium and the Federal Reserve wanted to conduct stabilization policy. What
policy would they conduct? How large would this policy have to be? Draw this graphically under
the Keynesian assumptions. Include both the IS/LM/FE and the AD/AS models making sure to
completely label the graphs.
e. (5 points) This should be done on a new set of graphs. Suppose when the economy is in the
Short Run equilibrium and the Government wanted to conduct stabilization policy. For this policy
they will change only government expenditure. How large would this policy have to be? Draw this
graphically under the Keynesian assumptions. Include both the IS/LM/FE and the AD/AS models
making sure to completely label the graphs.
f. (5 points) This should be done on a new set of graphs. Suppose that the government wanted to
try out a progressive tax system and changed taxes from T=20 to T=tax rate * Y. If the
government did not want this to impact the initial equilibrium at all what would the tax rate have
to be? (so this new IStax line would go through your initial equilibrium Y—this makes solving for
the “tax rate” simple (20=tax rate * Y0) and r in the IS/LM model) How does this change the SR
equilibrium—show this numerically and graphically?

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