Assignment

Part 1

1. Using the Keynesian Model with wage rigidity show graphically what happens to interest rates, effective labor demand, prices, and GDP in the Short Run and Long Run when there is a collapse in consumer confidence?

2. Considering the classical model with misperceptions, is it in the best interest of the Federal Reserve to be honest and transparent, non transparent, or a liar when they are considering if they should do an Open Market Sale. Show this graphically for full credit.

3. Show graphically the concept of "crowding out of private investment" for both the Classical Model and the Keynesian Model using IS/LM/FE when the Government increases expenditure. In which is the crowding out larger?

4. What is both absolute and relative purchasing power parity? Provide definition and show using an equation.

5. Describe the pros and cons of a currency union. In particular in regards to the inclusion of Greece in the Euro zone.

6. Compare graphically the effects of an increased risk in the financial markets on GDP and Prices using both the Keynesian assumptions and the Classical Model with misperceptions.

7. Compare graphically and explain what happens to exchange rates and net exports when (1) the home country has a decrease in GDP with (2) when the rest of the world has a decrease in their interest rates.

8. What happens to r, y, and prices in the SR and the LR (Keynesian model) when the government conducts expansionary fiscal policy? Is the policy neutral in the SR or the LR? Why or why not? What are the ways the government can do expansionary fiscal policy?

Part 2

1. Using the IS/LM model, AD/AS, the Asset Market, and assuming a initial price level of 1:

Goods Market:                Money Market:
C=250 + 1/2(Y-T)           M/P=450
I=150-500r                    L(r,y)=.5y-500r
G=100                           Long-Term Inflation: 3%
T=100                           Natural Rate of Unemployment: 4%

a. What are the IS, LM, and AD equations-show work for full credit?

b. Calculate and show the equilibrium output, interest rate, unemployment, Taylor Rule Fed Funds, and prices graphically?

c. Considering a Keynesian Model, show graphically using IS/LM/FE, AD/AS, and the asset market what happens to P, Y, unemployment, and r in the SR and the LR when there is an increased risk in the bond market-changing money demands responsiveness to interest rates by 10%.

d. Numerically, what is the short run equilibrium GDP, Price, Real Interest Rate, Unemployment Rate, Taylor Rule Fed Funds, and Level of Investment?

e. Numerically, what is the long run equilibrium GDP, Price, Real Interest Rate, Taylor Rule Fed Funds, Level of Investment, and Unemployment Rate?

f. Suppose that policymakers decide to open their economy up and the country's NX= .1(Yforeign-Ydomestic)+500(rforeign-rdomestic), YForeign=1750 and rForeign=15%. What are the new IS and LM equations?

g. What is the equilibrium output, interest rates, and NX?

h. If the R.O.W. goes through a recession and their GDP falls to 1500 what is the new equilibrium values from part h? Draw this graphically.