1.(25 points)

a.(5 points) Assume agents have adaptive expectations (i.e. ).Describe what happens to the economy if there is a positive aggregate demand shock (Eg. Increase in government spending). Draw a diagram to illustrate your answer.

b.(4 points) Draw the impulse response functions.

c.(4 points) Now assume agents form expectations according to . Explain in words what this means about the way agents form expectations.

d.(5 points) Describe what happens to the economy if there is a positive aggregate demand shock (E.g. Increase in government spending). Draw a diagram to illustrate your answer.

e.(4 points) Draw the impulse response functions in this case.

(3 points) Compare the impulse response functions obtained in (2) and (5). Comment on your results

7. (25 points) a. (5 points) Assume agents have adaptive expectations (i.e. art : 11:4). Describe what happens to the economy if there is a positive aggregate demand shock (Eg. Increase in government spending). Draw a diagram to illustrate your answer. (4 points) Draw the impulse response functions. (4 points) Now assume agents form expectations according to surf : 0.8rrt_jL + 0.23134. Explain in words what this means about the way agents form expectations. {5 points) Describe what happens to the economy if there is a positive aggregate demand shock (E. g. Increase in government spending). Draw a diagram to illustrate your answer. (4 points) Draw the impulse response functions in this case. (3 points) Compare the impulse response functions obtained in (2) and (5). Comment on your results