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Can I please have help with this, thanks. Question 3 Consider the model of financial intermediation as described in Woodford (2010) and in the following

Can I please have help with this, thanks.

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Question 3 Consider the model of financial intermediation as described in Woodford (2010) and in the following augmented IS-LM model. IS: Y = D(Y ,i, p(@)) +G ( + ) ( - ) ( - ) LM: MIP = L(Y,i ) ( + ) (-) Note that the function p( . ) is the macro-finance risk premium, which is a function of w, the interest rate spread. (a) Show using the model of financial intermediation that a contraction in financial intermediation leads to an increase in the interest rate spread between lenders and borrowers and also to a contraction in output. (10 marks) (b) Explain why a persistent increase in the risk premium as captured by the variable w can make cutting the interest rate by the central bank ineffective in terms of restoring output. Show your answer diagrammatically. (10 marks) (c) Explain mechanism of the credit cycle introduced by Kiyotaki and Moore (1997). How does it explain the link between asset prices and economic activity? (10 marks)

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