CALIFORNIA STATE UNIVERSITY, SACRAMENTO
Department of Economics

Economics 100A
Prof. Yang

Solutions to Homework Problems                     Chapter:  1  2  3  4  5   6  7  8  9 12

Chapter 9

Numerical

1.  a) In the year of the shock, the price level, being a predetermined variable, will stay at 1. Therefore, the real money supply will also stay constant and be M/P= 90011=900.

To calculate the new value of GDP and the new level of interest rates, derive the equations of the IS and LM curves, and then find the coordinates of the point where they intersect. Nothing has happened to shift the IS curve. Therefore, as before,

IS: R = .698 - .000188Y+ .00040.

Due to money demand shock, the equation of the LM curve changes. The new equation of the LM curve is LM: R = .00007915Y- .0005M/P.

Solving the IS and LM equations for Y and R gives the following equation for the AD curve:

AD: Y= 2612.764 + 1.4973G + 1.8716M/P.

Therefore, when G = 1200, M= 900, and P = 1, Y = 6093.9547 and R = .0323.

b)

In the year of the shock the economy moves from point A to B, and then, in subsequent years, it moves from
point B to C.

  1. In the long run, GDP will return to its potential level, which is Y* = 6000. So, in the long run,

    2. Y = 6000. Substituting Y = 6000, G = 1200, and M= 900 in the AD equation gives P = 1.0591.

    Next, substituting Y = 6000, M= 900, and P = 1.0591 in the (new) LM equation

    (or, equivalently, substituting Y = 6000 and G = 1200 in the IS equation) gives R = 0.05.

  2. Yes. The Fed could have immediately reduced the nominal money

supply to 850 ( 849.80 = 900/1 .0591).

 

3. a) graph not available

 

b)	Year     p e            p 	P	Y	U
	1	.0	5.0	1.05	5876	6.69
	2	3.0	.53	1.056	5863	6.76
	3	.32	-2.41	1.03	5924	6.42
	4	-1.45	-2.96	.999	6001	5.99
	5	-1.78	-1.77	.982	6048	5.73

c)	Year	p e             p 	P	Y	U
	1	.0	5.0	1.05	5876	6.69
	2	3.0	.53	1.056	5987	6.07
	3	.32	.05	1.056	5985	6.08
	4	.03	-.27	1.053	5992	6.04
	5	-.16	-.29	1.050	6000	6.00
d)	Year    p e              p 	 P	 Y	  U
	1	.0	5.0	1.05	5876	6.69
	2	3.0	.53	1.056	5740	7.44
	3	.31	-4.88	1.00	5860	6.78
	4	-2.93	-5.72	.94	6020	5.89
	5	-3.43	-3.03	.910	6102	5.39
e)	Year	p e              p 	P	Y	U
	1	3.0	3.0	1.03	5924	6.42
	2	1.8	.29	1.03	5917	6.46
	3	.17	-1.49	1.02	5955	6.25
	4	-.89	-1.79	.99	6002	5.99
	S	-1.07	-1.04	.99	6029	5.84

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