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ECON 2450
Frank Marchese

Answers to Practice Exercises From Chapter 9A Analytical Exercise 3 The IS curve shifts, In When, Consumers save more Unchanged When, Central bank lowers short-term nominal interest rates Term premium rises Out When, Tax rate decreases Businesses more optimistic Foreign interest rates rise Speculators become more pessimistic about domestic currency Policy Exercise 1 Y = C + I +G + NX C = C 0C y(1−t ) = $300 0.5(1 .4) Y I = I0− Irr = $120 $1,000 r f f GX = X Y f X εε = 0.01Y + $0.4ε IM = IM Yy= Y .2 NX = GX − IM f ε = 100 1,000( r −r ) Derive the IS curve for this economy: real GDP as a function of all the unspecified f variables in the economy. Suppose that the foreign interest rate r is 5%, that total foreign income Y is $10,000 billion, and that government spending G is $300 billion. What then is equilibrium annual real GDP if the central bank sets the real interest rate at 3%? At 5%? At 7%? In this economy, the MPE is C y1–t) – IM y 0.1. In this economy, the level of A , of non-interest-sensitive autonomous spending 0 is: f f f f A 0 C + 0 + G0+ X Y + 0f4 (100 + 10r )=460 + 0.01Y + 40 r + G Thus the equation for the IS curve is: A0 Ir+ X εε r Y =
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