ECON 301.01 ~ Test #3 - 12/01/2022 ~Duroy Name: Pledge: By writing your name above you agree that you will not discuss any aspect of this test with any student who has not taken the test in section 01 and/or 02, Any breach of agreement will be treated and prosecuted as a violation of Denison’s Code of Academic Integrity Problem Sets ~ 50 pts Question 1 - Decreased money demand in the basic AD-AS framework — 10 pts Using the basic version (horizontal SRAS) of AD-SRAS-LRAS with MV=PY, explain and show graphically the impact of a decrease in money demand (k) 1) Inthe short-run 2) Over time Mek and Mery ap MY = kY2M oye e ev Vv PRU hav ba gien HM, Sheff to the aghh LRAs, mvt satya Ap O as AdD® of as peur are, strky Ue sR, ZACKS, @® Y>V a pos fie My ortpt sao causes Parus to Macatee > ¥ ever fuse v7 leading to a shal hh SAAS vpwad as PF purchasing power b> moves bocle dow. to ¥Question 2 ~ IS-LM and policies - 20 pts Assume that an economy, facing sticky prices, is characterized by the following information: C= 175 +.75(Y-T) I= $00 -40r G=300 a. Write the equations for IS and LM b. Solve for rand Y at the short-run equilibrium ©. Assume that as a new session of Congress starts in January, its members vote to decrease government spending by $100B in order to start paying off the national debt. Compute the new values ofr and Y, Compute the net multiplier effect of the decrease in government spending (i.e. after the change in r) 4. Ifthe Fed wants the interest rate to stay the same as the one you calculated in b,, after the decrease in G of 100, what should they do in terms of money supply. Compute the value of M necessary to keep r the same. @-ES: Yo 145+. t5(y¥—-Bes) + Sd0-Yor +3eo Vo 195+2254+ Bo t-FSY -Yor Yn 450 +ASY—Yor US > 5% -Yor Ya 3,000 - lb6ar LM: M otc) ap 402 2 ¥ Ibo Y= 2,000-+( 6o- r a2 ba BGni Bove - [bor = 2,009 160 = GaSose = ltse5) 2,500 a - o- Ae rags > AY efoto) = Y C10) 2-09 Mew ES: V2 2 boo -lbor ES=Le ced 2600 ~ (bors 2, os H600 boo = B2or =p ce B25 b%20 nek multiplier: = 209 26-1845) = 2,300 100 A. se (ast (rageQuestion 3 — Output gap and fiscal policy — 10 pts Consider an economy with an mpe= .9 and an output gap of -8500B (assume that the interest rate is unchanged). a. Congress agrees to increase government spending to eliminate the gap but only on the condition that taxes be raised by the same amount, so that no budget deficit is created. By how much would G and T need to change in order for the output gap to be eliminated. ». Instead Congress authorizes budget deficit to eliminate the output gap, using taxes alone. Compute the change in taxes necessary to eliminate the output gap in this scenario. Recall AYoL. (AZ,8E4kG) MPO bape Vere J&B=o aud AGsAr oO bys emPKae op AY=AG Irampe Gock AYs 45x90 to elvmmafe ge a6 bes 4G 247 AG=+5w a b. w/ Taxes alone AY. ZT Ar =e Sooe7-? ar Im aetQuestion 4 — Monetary policy, SRAS (positive slope) and Phillips Curve ~ 10 pts ‘The Fed is actively trying to fight high inflation via contractionary monetary policy. On IS-LM, AD-AS and PC graphs, show how in the presence of adaptive expectations (briefly define hat they are), the Fed's policy might lead to a hard landing in the short-run (recession and high ‘unemployment) for the economy. Briefly explain what should happen to prices overtime (you do not need to represent this graphicallyYice °, LM, (e?,) . adaptie eppectahous f | ~- heel wWflato. Cs berm °. yO “e m 7 abscreed MebCohen C hack uard- leskog J i OCA LM Fe oem ' 7 Shibtr ep =s AD shaftr Te He Of asr Pa Sb apy abe _ oup-t Dass Yp 7 as T %, Soné Livan decrease Hair prrerte - [fh ev, WO wn-urtPatrd on P|] over Time as Ya, Al pates wold dacreare , Ladny bo a daceas ih soflahron. (agent of tfe Fadl)QQ d- keep r23.\2o * hy dew Me 2,600 = Ibo (3.125) = Zoo M Bt ler ee M 2,boa- (605.125) 1 Soa } is 2 z M n = (6002 = 3, 200| ae