CALIFORNIA STATE UNIVERSITY, SACRAMENTO
Department of Economics
Prof. A. R. Gutowsky
Economics 100A
Problem Set 5
Chapter 11
1. How does fiscal policy -- increase or decrease in government spending -- affect the
level of output (Y) and the rate of
interest (R) in an LM/IS model?
(A) Which changes first, R or Y? Explain.
(B) Which changes second, R or Y? Explain.
2. Repeat the above question for monetary policy -- tight or easy.
3. Discuss the interaction between monetary and fiscal policy.
4. Discuss the shocks that can occur in an LM/IS model.
5. Derive an aggregate demand schedule
(A) graphically
(B) algebraically
(C) Know the material on pages 292-293.
6. Know the LM/IS model in the short and long run. See pages 294-295
(A) Why is the Price Level (P) fixed in this
model?
(A) What does the classical economic approach assume about Price? Explain.
Chapter 13
1. Discuss the economic meaning of the equation found on page 350.
2. What is the sticky-wage model?
(A) Know the meaning of the equations found on
pages 351-352.
3. What is the worker misperception model?
(A) Know the meaning of the equations found on
pages 353-354.
4. What is the imperfect information model?
(A) Know the equation on the top half of page
358.
5. What is the sticky-price model?
(A) Know the equations on pages 358-360.
6. Why is the short-run aggregate supply schedule (Figure 13-6 on page 362) upward sloped?
7. Why is the long-run aggregate supply schedule perfectly vertical?
8. Understand the meaning of Figure 13-7 on page 363.
9. Derive the Phillips Curve (PC) from the aggregate supply schedule.
(A) Why is there both a short-run and long-run
PC?
(B) Know the equations on pages 364-365.
10. What are adapative expectations?
(A) How do such expectations affect the PC?
11. What are the causes of inflation?
12. What are the causes of deflation?
13. Is there a trade-off between inflation and unemployment? Explain.
14.What is the "sacrifice ratio?"
15. What are rational expectations?
(A) How do rational expectations influence the
"adjustment" process?
Chapter 12
1. What is the "Mundell-Fleming (MF)" Model?
(A) Who is Mundell?
2. What is the relationship between r = r* and perfect capital mobility?
3. What happens to the IS schedule when NX are introduced?
(A) Derive the IS Schedule for an open economy
from an open economy Keynesian cross diagram.
(B) Derive the NX schedule.
4. What happens to the LM schedule when the economy is open and there is perfect capital
mobility?
5. Know Figure 12-3 on page 317.
6. A small economy under floating exchange rates.
(A) What is a floating exchange rate? What is a
clean float?
(B) How does fiscal policy function in such an
economy?
(C) How does monetary policy function in such
an economy?
(D) How does trade policy function in such an
economy?
7. A small economy under fixed exchange rates.
(A) What is a fixed exchange rate? What is a
dirty float?
(B) How does a fixed exchange rate system work?
Know Figure
12on page 321.
(C) How does fiscal policy function in such an
economy?
(D) How does monetary policy function in such
an economy?
(E) How does trade policy function in such an
economy?
8. What are the policy implications of the MF model?
9. Should exchanger rates be fixed or floating? Explain.
10. Discuss the MF model with a changing price level.
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