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PART B: Long Questions Long Question 1: (70 points) Consider the short run model of Chapters 1 1 and 12. The national income identity is
PART B: Long Questions Long Question 1: (70 points) Consider the short run model of Chapters 1 1 and 12. The national income identity is given by Yt = Ct + + Gt + EXt - IMt (1) where Yt is real actual output, Ct is consumption, It is investment, Gt is government spending, EXt is exports, and IM, is imports (all in period t). Assume that the "demand" variables are given by: Ct / = ac (2) Gt/ . = ag (3) EXty = dex ( 4 ) IMty = aim (5) "/. = at - b(Re - F) (6) Where ac , ag , dex , dim , di , g and b are given positive parameters. Moreover, Yt represents potential output, Y, is short-run output, R, is the real interest rate, and r is the marginal product of capital or just the long run interest rate. %f) Explain what is going on in part d) compared to part e). That is, explain how the impact of monetary policy is different depending on the magnitude of b. (10 points)
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