Intermediate Macroeconomics

homework4.pdfhomework4.pdfhomework4.pdf1 Short Answer
1.1
True / False Are low nominal interest rates always a sign of tight money?
1.2
In the delevraging model in class, why must prices/interest rates fall when (binding) constraints on debtors get tighter ?
1.3
What do falling prices do to the value of debt in nominal terms?
1.4
What do countries give up when they choose to fix an exchange rate. Why might a country do this?
2 Model Analysis
Following the question label each part by the number it corresponds to.
2.1
Using the IS-MR-PC Model show the following:
1. Consumers and Investors begin to worry about lower gdp in the future, reducing consumer and investor sentiment.
2. Why does this put downward pressure on land prices? Further reducing wealth of households and firms. If land is used as collarteral, how is the initial shock amplified? Show the effects of this change on the model.
1
3. Given this and decreased inflation expectations, why does the money sup- ply decrease? What effect does the increase have on Y,r,i? Why might the Investment Savings equation change/shift?
4. What happens to zero lower bound as disinflation increases. Given that the stabilizing interest rate lies below the zero lower bound, what policy actions could be done to allow the few to operate according the monetary rule.
2.2
Use the partially open model, IS-LM/ IS-MR-PC for the central bank questions at the end.
1. The central bank fixes the exchange rate in a partially open economy (assume like in class that marginal propensity to import is zero). Show a decrease in consumer demand
2. Neighboring countries also experience recessions so exporter sentiment falls. What effect does this have on output?
3. Since Y falls, what happens to taxes. Is the debt to nominal gdp ratio growing overtime.
4. Show the effect of the increase in r on the debt growth rate from risk premia.
5. How might this effect LM curve? Why might fiscal austerity be expan- sionary?
6. Why might fiscal policy be ineffective? Why can’t the country use mone- tary policy while keeping the fixed exchange rate?
7. What is the right policy response from the central bank?
8. Show what happens when the central bank implements the plan above.