Please answer both questions

Page 8 of 9 2 Short answer (38.75 marks) Question 2 (20 marks): Consider the following economy NOTES: C( Y - T) = a+b(Y -T) 1. YOU MUST SHOW YOUR WORK. SOLUTIONS WITHOUT SUPPORTING DERIVATIONS WILL I(r) = c-dr NOT RECEIVE FULL GRADES. G =G 2. WHERE APPLICABLE, YOU MUST PUT A BOX AROUND YOUR FINAL ANSWER. where a > 0, 0 0 and d > 0. (a) Solve for Y as a function of r, the exogenous variables, G and T, and the model's parameters a, b, c, and d. (3 marks) Question 1 (20 marks): Consider the following two-period model, (b) How does the slope of the IS curve depend on the parameter d? Explain your intuition. (2 marks) Now suppose the demand for real money balances is a linear function of income and the interest rate, given by: Max Cicis L(r, Y) = eY - fr subject to C + S1 = Y1 where e > 0 and f > 0. and C = Y2 + (1 +r)S1 (c) Solve for r as a function of Y, M. and P and the parameters e and f. (3 marks) where Y1 = $100, Y2 = $100, r = 0.25, and B = 0.5. (d) How does the slope of the LM curve depend on the parameters f? Explain your intuition. (2 marks) (a) Derive the intertemporal budget constraint. What is the maximum possible consumption in period 1? What is the maximum possible consumption in period 27 (3 marks) Lastly, (b) Derive the necessary first order conditions for C, and C2. Solve for the Euler equation and interpret this (e) Using the answers above, derive the aggregate demand curve (Hint: This expression should show Y as a equation in your own words. (6 marks) function of P. M. G. and T', and the model's parameters). (3.75 marks) (c) Solve for the optimal values of consumption, Of and C2 (6 marks) (f) How do increases in G and M impact the aggregate demand curve? What about decreases in 7? (5 d) Consider an increase in the real interest rate r, does the substitution effect dominate the income effect for marks) period 1 consumption? (3 marks) (e) Suppose this individual faces a borrowing constraint (Ci S Y1). what are the optimal values of consump- Question 3 (Bonus, 2 marks): Online learning is difficult for all of us. List 2 things that would make your tion, Of and C2? (2 marks) online learning experience in this course better. 8 K D D 9